Sunday, 24 November 2019

How To Start Investing In Dividend Stocks For Passive Income

How To Start Investing In Dividend Stocks

I'm going to share how you can earn passive income by utilizing something known as dividend investing. Investing in dividend stocks it's something that has been around for quite some time, it's something you can consider taking advantage of in order to earn some extra cash on a monthly basis. We're going to dig into that in this article.

There are two different ways of making passive income. You're putting something upfront to then reap the rewards of it later and you can use time upfront which some people don't have or you can put money upfront to then earn money off of your money, this is how the rich stay rich, they invest money and then make money off of their money.

You don't have to have a lot of money in order to start with this, I started with literally $50 with a dividend investing and have built it up over time. When I started I didn't have a mentor, I didn't have someone to show me how to do it, or teach me how to do it, but I just used free resources online and various different books to learn how to invest into dividend stocks and invest into various companies to then earn money from my money. So you can do this, anybody can do this, it's very possible.

Let's Get Started


What Is Dividend?

It's just a payment that a company is going to give you for owning that company stock. That's the best way to think about it, it's almost like a little bonus or a cash payment that they're going to give you either on a quarterly basis, sometimes on a monthly basis, or even in some cases on an annual basis depending on how they structure it, but they're going to be paying out in cash for you owning that company stock.

I'll give you an example here of how this actually works and how you can take advantage of this.


Why Some Companies Pay Dividend And Other Companies Don't.

If you look at PepsiCo which I'll show you a little bit more in-depth, but if we look at Pepsi they're paying almost about a 3% annual dividend versus amazon, facebook or Netflix, they don't pay a dividend.

Pepsi



Amazon



Some companies pay these cash payments as dividends and all others don't. And the reason for this is because one's generally in the tech sector or companies that believe that they can reinvest this money back into themselves a little bit better, generally won't pay out dividends but rather just take the profits and put it back into R&D or various other things that they can then grow their business faster and hopefully grow their stock faster. Then dividend stocks that are generally more well-established, you'll see them as blue-chip stocks companies that maybe have been around for quite some time but like to pay out to attract new investors with that dividend.

Let's take a look at PepsiCo to give you an example here as to how you can actually take advantage of this. But what I'm using here is just a free resource you can use yahoo finance, it gives you a little bit of information about this company and a nice decent understanding and an overview of this company. You can also go on to the company's website, look at the various other investor relations page just about every company that's traded on the stock market is going to have an investor relation or investor resources page on their website and they're going to have a lot of information on there.

If you ever considering investing in a company, just go on to their company's website or just go on to google and type in investor relations for that company.

Let's take a look at Pepsi here to show you how can you take advantage of dividend investing.



$134 per share for this particular stock, that means if you have $134 of your money invested into Pepsi you could be earning about 2.8% as a dividend payment from that company. About $3.82 in the course of a year as a cash payment to you paid out on a quarterly basis, every 3 months you'd be getting one-fourth of this $3.82.

This might not seem like a lot of money, $3.82 i can barely buy a cheeseburger at faster food place how is this worth it, well, the key here is that you're building this up over time, and what you can do is maybe you only have one share of Pepsi for $134, but over time if you had 10 shares or a 100 shares this could really add up or even a thousand share you can be making thousands of dollars per year in dividend payments that you can then use towards car payments or Netflix subscriptions or various other things that you want to spend money on and it seems to be very sustainable over the long run.

If you are using yahoo finance, just go to the statistic and look a little bit more about their actual dividend and the other financial metrics you can take a look at




But looking at the dividend there are a couple things that you're going to want to be aware of. One of them is the payout ratio this is a very important financial metric that you want to consider when looking at dividend stocks. If you're seeing this number quite high like over 100%, this could be somewhat of a red flag showing that maybe this company isn't able to sustain dividends that they're paying out and this is what I really want to caution on.


Mistake To Avoid When Investing in Dividend

I started young in the stock market nobody was showing me the way so because of that I made a lot of mistakes when I was younger. And one of them was that I was falling into dividend traps and I don't want to see people do this for themself.


  • Dividend traps what can happen is a company might have a very high dividend to attract investors and then either slash that dividend as a new investors come in or just not be able to increase their stock price because they're paying out so much money in dividend payments that they're not able to reinvest back into their own business.

If you're seeing companies that are paying out very high dividends you want to look at the payout ratio, you want to look at their history of paying dividends as well as their stock price because something else you want to consider is you want to look at this company's dividend over their lifetime but also their stock price and factor those two into the equation, for example, company one pays out a 6% dividend, but their company stock is losing 4% per year over the past 10 years, well, your total gain on that might only be about 2% per year because you're getting a high dividend but the company is not growing, it's declining. That's actually not that great.

Then the other company that is paying out a 3% dividend but growing at a 4% rate, so you could be earning 7% on that one with a smaller dividend but the company stock it actually increasing. that's a great example for something like Pepsi they've been increasing over the long run, have been increasing their dividend as well as increasing their stock price in the long run which is something you definitely want to consider. 

Don't just look at the dividend, i sort of think of a dividend payment as a cherry on top, it's not the first thing you want to look at but certainly something that you do want to factor into the equation as to whether you're going to invest into that company or not invest into that particular company.


How Much Money Can You Make With Dividend Investing

What I want you to think about here is let's say that you're earning 3% annually from your dividend payments if you're starting with $50 like myself over the course of a year, the dividend payments you might get like $1. But if you can build this up to $100,000, well, $100,000 3% annually would be about $3,000 which is about $250 a month in cash coming into your pocket that you can then use on various expenses and what's interesting about this is that it's in many cases is quite sustainable.


Word Of Caution

It could be very sustainable but there are times where the market declines will see recessions, there is a time of hard economic, times you want to be very careful of and think about before putting any money into investments. There are risks and you need to be aware of that, but what I personally do is I reinvest the dividends that I get from these companies back into these companies or various other different types of investments and I think this is the key to finding success over the long term

Instead of taking that dividend payment and spending them on your mortgage, car payment, or something else, just reinvesting them back into various other companies or various other different types of investments and that is how you can build wealth over the long term.



Conclusion

Dividend investing, passive income through dividends it's definitely a long-term game it's not something you jump into and get out of in a couple weeks and make a lot of money, it's not going to make you a millionaire overnight, but it's something that could potentially make you a millionaire over your lifetime and it's something that as been proven by millions of people have done this and they've done very well with it. So it's something you want to consider doing. 

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