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One of the ways that you can earn passive income is through dividend investing. Companies that pay dividends actually pay out a portion of their profits to shareholders. If you invest in a company that pays dividends, you receive a dividend monthly, quarterly, semi-annually or yearly (depending on how the company does things). These dividends are paid out to shareholders, and are different from earnings from selling or trading stock in the company.
Dividends can be incorporated into a long-term plan for yielding wealth, as well as provide regular income. Indeed, there are some investors that invest solely in dividend paying stocks, watching their portfolios grow over time and receiving an income stream when dividends are paid out. There are some who manage this well enough that dividends provide a large portion of their income.
DRIPs
It is possible to compound the earnings you receive from dividends through programs known as dividend reinvestment plans (DRIPs). DRIPs are set up with some dividend paying companies who take your dividends and automatically reinvest with the company, buying more stock. I have some DRIPs in my Roth IRA. Every time a dividend is paid, it is automatically reinvested, allowing me to buy a couple extra shares of stock. It’s basically like getting free shares. And it’s a good way for me to automatically increase my investment.
For the most part, though, dividend investing isn’t going to result in immediate results. In this economy, you might disappointed (although there are some companies that have actually increased their dividends). Dividend investing — especially when you make use of DRIPs — are part of a long-term strategy. However, the cumulative effect can provide a reasonable passive income for those with the patience to make it work.
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Top 50 list of the highest dividend yielding S&P 500 Dividend Aristocrats±
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I have DRIPs in my IRA index fund. Anyway, while I wouldn’t invest exclusively in DRIPs, I think they are valuable — especially if you are looking for somewhat steady income. The issue, of course, is choosing fundamentally solid companies that are likely to stay solid for the long haul.
I have nothing against DRIPs per se, but it could take a chunk of change to get proper diversity and many of them change some steep fees for the small investor. Plus you tend to get locked into locked into companies long term, which isn’t bad as long as you don’t pick companies that perform poorly.
I would tend to favor a dividend oriented index fund that provides diversity for cheap and allows the dividends to compound.
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I’m a huge DRIP investor, have just posted about how you can get started in DRIPs. These are perfect if you only have a small amount to invest, or if you’re just getting started investing. Check it out!