Dividend Investing: How To Generate Passive Income From Stocks 

There are a multitude of different ways that you can grow your wealth through stock investing, and it all comes down to 2 main categories:

  1. Growing your wealth through capital gains (i.e. when the stock price increases and you sell your shares for a profit)
  2. Generating passive income

One of the safest ways to generate passive income through stocks is through dividend investing.

In this article, we’ll cover:

  • What is dividend investing?
  • Why should you care about dividends?
  • How can you start dividend investing?
  • What are the best dividend stocks to invest in?

But before we get started, let’s first cover the basics of what dividends are and how they work.

What is Dividend Investing and Why Should You Consider It?

Dividend investing is simply when you invest in stocks that pay regular dividends.

Dividends are a portion of the company’s profits that are distributed to shareholders on a regular basis (usually quarterly). So as a dividend investor, you’re essentially earning money just by owning shares of stock in a company. It’s like collecting apples from an apple tree that you own every season.

There are a few reasons why this could be appealing to you:

1) It’s a great way to generate passive income – You’re essentially being paid just for owning the stock. And unlike other forms of investments (such as bonds), you don’t have to wait until the investment matures to receive your payments.

2) It’s relatively safe – Since you’re not relying on the stock price to increase in order to make money, you’re not as susceptible to the ups and downs of the stock market.

3) It can be a great way to diversify your portfolio – Dividend stocks tend to be large, established companies that are less volatile than some of the smaller, more speculative stocks out there. This means that they can help mitigate some of the risk in your portfolio.

4) You can reinvest your dividends to compound your returns – One of the best things about dividend investing is that you can automatically reinvest your dividends back into the stock, which essentially allows you to “buy more shares” without having to put any additional money out of pocket.

5) You can get started with less capital – Unlike property investing, which tends to require quite a lot of upfront capital and leverage (i.e. debt in the form of a mortgage), you don’t need a large amount of money to get started with dividend investing.

And since most dividend stocks pay their dividends on a quarterly basis, you’re effectively getting paid to invest!

How Do Dividend Payments Work?

Now that we’ve covered what dividend investing is and some of the reasons why you might want to consider it, let’s take a look at how dividend payments work.

As we mentioned earlier, dividends are a portion of the company’s profits that are distributed to shareholders on a regular basis. These are usually announced beforehand on what’s called the ex-dividend date (or ex-date) and paid out after on the payment date, which is usually 2-4 weeks after the ex-dividend date.

These two dates are quite simple, however, some investors can sometimes still find it confusing when it comes to figuring out whether you’re qualified for the next dividend payment or not.

To clarify, the ex-dividend date is the day the stock starts trading without the value of its next dividend payment. In other words,

  • If you purchase a dividend-paying stock the day BEFORE the ex-dividend date, then you are entitled to receive the next dividend.
  • If you purchase a dividend-paying stock ON the ex-dividend date or AFTER the ex-dividend date, then you are NOT entitled to receive the next dividend.

This, of course, all ‘resets’ when the next ex-dividend date is announced – so you will be entitled to the dividend payment after so long as you hold on to the stock during that time.

Once you qualify, the dividend payment will be deposited directly into your brokerage account on the payment date, and you can then do whatever you want with that money (e.g. reinvest it back into the stock, withdraw it and spend it, etc.).

One thing to keep in mind, however, is that dividend payments are not guaranteed. This means that the company can choose to suspend or even eliminate their dividend at any time.

While this is relatively rare, it does happen from time to time, so it’s something to be aware of before you start investing in dividend stocks.

Now that we’ve covered the basics, let’s take a look at how you can get started with dividend investing.

How to Start Dividend Investing

If you’re interested in dividend investing, there are a few things you need to know before getting started:

1) Determine your investment goals – Before you start buying any stocks, it’s important to first determine what your investment goals are. Are you looking to generate income? Are you looking to grow your portfolio? Is dividend investing the best strategy for your investment goals?

Determining your goals will help you narrow down which stocks to buy and how much of each stock to buy.

2) Do your research – Once you know what you’re looking to achieve, it’s time to start researching different stocks. When doing your research, be sure to look at things like the company’s dividend history, as well as their recent financial reports.

3) Open a brokerage account – Once you’ve found a few stocks that you’re interested in, you’ll need to open a brokerage account so that you can buy and sell them. There are a variety of different brokerages out there, so be sure to shop around and find one that best suits your needs.

4) Start buying stocks! – Once you’ve opened your account and done your research, you’re ready to start buying stocks! When purchasing stocks, be sure to pay attention to things like the stock price, the dividend yield, and the company’s financial reports.

5) Monitor your stocks – After you’ve purchased your stocks, it’s important to monitor them on a regular basis. This means keeping an eye on things like the stock price, the dividend payments, and the company’s financial reports.

By doing this, you’ll be able to make sure that your stocks are performing well and that the companies are still in good financial shape.

Don’t Make This Amateur Mistake With Dividend Investing

When it comes to dividend investing, one of the biggest mistakes that amateur investors make is focusing completely on the stocks that provide the best dividends, without factoring in the company’s financial stability.

This is a huge mistake, because while a high dividend yield might look good on paper, it doesn’t mean anything if the company isn’t in good financial shape.

Remember, companies can (and do) suspend or even eliminate their dividend payments at any time. So, if you’re only looking at stocks with high dividend yields, you could end up losing a lot of money if the company suspends their dividend.

Instead of focusing only on the dividend yield, be sure to also look at things like the company’s financial reports, their recent share price, and their overall financial stability. This will help you avoid any companies that might be at risk of suspending their dividend payments.

If you’re new to the world of stock investing and trading, and you’d like some help figuring out a company’s financial stability, you can check out our free 10 Must-Have Stock Criteria checklist, which shows you how I rapidly shorten my stock research process by filtering out what I consider to be the top 1% of stocks in less than 5 minutes using a free online tool.

What Are The Best Dividend-Paying Stocks?

Because of the ever-shifting nature of the stock market, it’s impossible to really tell you specifically what the best dividend-paying stocks are without constantly updating this post.

However, generally speaking, there are a few sectors where you might have a higher likelihood of finding some good dividend stocks:

Utilities

Utility stocks tend to be some of the best performers when it comes to dividends, as they often have high yields and are relatively stable.

Real Estate

Real estate investment trusts (REITs) can also be a great source of dividend income. REITs are required by law to pay out a certain percentage of their earnings as dividends, so they can offer investors a steady stream of income.

Telecommunications

Telecommunications companies are another good option for dividend investors, as they often have high yields and are relatively stable.

These are just a few of the sectors that tend to do well when it comes to dividend investing. Of course, there are other sectors that can also offer good dividend growth potential. The key is to do your own research and find the sectors that best fit your investment goals.

Final Thoughts

Dividend investing can be a great way to generate passive income and build long-term wealth. However, it’s important to remember that dividend stocks are just like any other type of stock, and they come with their own set of risks.

Before investing in any stock, be sure to do your own research and understand the risks involved.

If you’re unsure how to do your own research, and you’d like some help, here are two resources I’d like to suggest:

  • The first is our FREE 10 Stock Criteria Checklist, which helps you identify what I consider to be the financially strongest 1% of stocks in the market at any time in less than 5 minutes. Click here to learn more.
  • The second is our FREE 90-Minute Online Masterclass, where I’ll show you how I personally anticipate market crashes in advance and prepare for them. Click here to learn more if you’re interested.

Terry

You may also like

Disclaimer

Effective Trading Solutions Pty Ltd trading as theFreedomTrader.com (ACN: 160 101 959) (“theFreedomTrader”) is registered in Australia and is a Corporate Authorised Representative (CAR No. 1267698) of Australian Financial Advisory Group Pty Ltd which is the holder of Australian Financial Services Licence No. 475300). All material provided on this website is general advice only and does not take into consideration your personal objectives, financial situation or needs. You should seek independent financial advice and read the relevant disclosure statements prior to acquiring our services. TheFreedomTrader.com does not operate as a formal training provider and is not registered as a training provider.