If given the option, most people would love to earn money without having to do any work at all. Passive income is a way to receive money from something that already exists and requires minimal effort, if any. By renting out a property, creating a YouTube channel or lending out money, you could earn without lifting a finger after establishing your income source.
Many finance experts agree that one of the best ways to earn passive income is through investing your money and earning dividends .
When you buy a share of a company’s stock, you become a part owner of that organization. This means you’re entitled to receive some of the profit that the company makes when it is successful in return for lending it some of your money. In some cases, this will be in the form of a dividend, which is a portion of a company’s profits paid out regularly.
Many investors choose to buy stock in companies that offer dividends, as they provide predictable cash flow. Stephan is one of those investors. He explained that he makes $10,000 per month through five main dividend sources.
To determine whether dividend investing is a viable option for your financial situation, consider some of the advantages and disadvantages of doing so.
Dividends are beneficial because they provide investors with a predictable income that often stays the same despite the stock price. While dividend amounts can change, they’re much less volatile than stock values. On top of the dividend income, the value of the stock can rise and provide you with even more value when you sell the shares.
Dividends also can provide some tax benefits. As Cardone said in the video, “Depending on your tax bracket, dividends can be taxed at a much lower rate.” In addition, dividend reinvestment plans enable you to automatically purchase more shares of the company with your dividends, potentially increasing your long-term returns.
Cons of Dividends
While dividends present an excellent opportunity for investors to make passive income, they still present some risk. Companies that perform poorly may cut their dividend, resulting in less value or even a loss for investors.
The IRS also taxes dividends differently than regular stocks. When buying and selling stocks, the IRS taxes you only when you sell. With dividends, the IRS taxes you the moment you receive your payout, which could be a hefty amount, depending on your tax bracket.
Earning Passive Income Through Dividends
Everyone has a different standard of living. Factors such as where you live, your spending patterns, what you eat and your health all affect how much money you need to earn to live.
To determine how much the average person would need to invest to live off dividends, Stephan used information from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey, finding that the average retiree spends about $50,000 per year. To reach this amount with dividend payments, you should look at what organizations provide consistent dividend payouts over the long term rather than just looking for the companies that pay the highest percentage.
Stephan estimated that a diverse bundle of stocks that produces a 3% annual dividend yield would mean you’d have to invest $1,670,000 to earn the average retirement income of $50,000 per year. For many, this is a substantial amount of money. However, Stephan broke it down, saying that it’s possible by investing $5,000 per year, receiving 8.4% on that investment and reinvesting the dividends for 40 years.
Making the Most of Dividend Investing
Earning a passive income through dividends looks easy on paper, but earning the money required to do so takes time. Dividend investing can be an excellent way to earn money, but there are still risks. Investing in stable companies with a lower dividend yield may not be as exciting as other options, but it will offer more consistency and stability with your investments.
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