What is passive income and is dividend one of them?
Passive income is any income that requires little to no effort to earn and maintain. It is as good as free money that comes in while you continue your daily routine either working at the office, by the Nusa Dua beach, or cycling down the hills in Santa Rosa.
A dividend is a payment made by a company to owners of the company’s stock. The payment can be either monthly, quarterly, or annually, and it is a way of distributing revenue back to investors. A dividend is paid through ownership of stocks, and you are not entitled to dividends through options trading. Also, not all stocks pay dividends, so if you are keen on building passive income, you need to choose dividend stocks.
Why build a passive income if I already have a primary source of income?
Typically, generating an income requires your time and active participation in the form of a full-time job. Living in an urban city area, I have met individuals that have to work multiple jobs to sustain the cost of living. Imagine working 8 hours a full-time job and clocking in another 3 hours hustling as bartender, waiter, sales job daily. The problem is, we have 24 hours in a day, and there is only so much we can trade our blood, sweat, and time for an income. I am willing to bet anyone would not mind earning some extra income without the time commitment. In my opinion, passive income is the best type of income because there are so many things in the world that I would like to try, such as surfing, hiking, camping, cliff diving, etc. which requires a time commitment.
How to build a dividend portfolio for regular income?
Well, first of all, just like any other investment, you need capital to purchase dividend stocks. I suggest setting an automatic contribution every month to consistently build the investment capital and average the cost of buying shares.
Second, focus on the following metrics when evaluating dividend stocks.
- Annual Dividend Yield – the percentage of dividend per share received relative to the stock price
- Dividend Growth – current year dividend per share divided by last year. The idea is to find companies that increase dividend payout to their investors.
- Dividend Safety Score – calculate the payout ratio using dividends paid and net income. I suggest a payout ratio of approximately 60 – 65% for a sustainable dividend payout.
Third, diversify the portfolio to minimize risks and maximize returns by investing in different industries. I am not a financial advisor, but some of my dividend stock selections are as below;
Telecommunication – AT&T, Verizon
Consumer Discretionary – Cracker Barrel Old Country
Consumer Staples – Universal Corp
Energy – Exxon
Utilities – Duke Energy
Healthcare – Johnson & Johnson
Real Estate – W.P Carey
Financials – TD Bank, Bank of Montreal
Energy – Pembina Pipeline Corporation
As you can see, I try to diversify and invest in companies that have a long history of paying dividends across all industries. You can be flexible and mix your portfolio with new and upcoming dividend stocks, dividend growth stocks, as well as international dividend stocks to balance your risk appetite.
Once you have your invested dividend portfolio, I suggest reinvesting any dividend income into your portfolio for the first five years. If you want to live off of dividends in the future, you need to invest the most you can to build a more extensive portfolio, which yields a higher dividend return. In the states, a dividend yield of 6% is considered a high return on investment in comparison to cash deposit (CD), and not to mention the interest on a savings account.
In conclusion, dividends are purely passive income. You reap the benefits long term after putting in some upfront time to choose the best dividend aristocrats. For long term investment, I will opt for dividend investment for a steady cash flow return. For short term investment, I will take a little bit more risk in playing the options trading. It is all about learning, improving, and having a little bit of fun.
Stay safe, and wash your hands!