If you're looking for a simple way to jump-start your passive income goals, dividend-paying stocks can make your bank account fatter over time.
Dividends are one of the simplest forms of income that you can get your hands on. You don't need to be hugely rich to start earning dividend income. If you learn how dividend-paying stocks work and set up a strategic plan, you could end up with extra deposits in your account in the next 90 days.
If earning money from dividend-paying stocks sounds complicated or impossible, we'll break down how it works, as well as the simple formula to get you on the path to $1,000 per month of passive income.
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Your path to passive income
Companies all over the world reward their shareholders with monthly or quarterly dividend income for hanging on to the company stock. If the board of directors continues to declare dividends, you can earn this extra income for as long as you own the stock without lifting a finger. Your income depends on the annual dividend that a company pays and how many shares you have.
Let's say you own 1,000 shares of a company that pays a $5.00 annual dividend. You have the potential to earn an extra $5,000 in your account for the year, even if the price of the stock falls. Not all companies pay dividends, but for those that do, you'll get the extra money on the dividend payment date as long as the board of directors declares the dividend and you're an owner of the stock by the cut-off date (that determines which shareholders are entitled to receive the dividend).
Building your dividend portfolio from scratch
There are a few things you want to do before you jump in, such as:
- Determine your end goal. When you know what you want, every other step on your dividend journey will be so much easier.
- Consider your time horizon, risk tolerance, and savings rate. This will give you a better idea of what types of dividend-paying stocks best align with your goals.
- Choose where you want to house your dividends. You have various options, such as taxable brokerage accounts and retirement plans.
- Review your options, do your research, and add dividend-paying stocks to your watch list.
Some dividend-paying companies, like Dividend Aristocrats and Dividend Kings, have been growing their annual dividend every year. That means you'll get an automatic pay raise and earn more dividend income every year if the board of directors continues to declare a dividend.
Earning $1,000 per month in dividend income
Let's start with a simple example of how you can earn $1,000 per month or $12,000 every year in dividend income with four stocks in your portfolio.
- Stock 1: Your quarterly dividend is $1.00. You own 1,200 shares, equaling $4,800 per year in income.
- Stock 2: Your quarterly dividend is $2.00. You own 400 shares, equaling $3,200 per year in income.
- Stock 3: Your quarterly dividend is $1.40. You own 500 shares, equaling $2,800 per year in income.
- Stock 4: Your monthly dividend is $0.10. You own 1,000 shares, equaling $1,200 per year in income.
You've set yourself up for $12,000 per year in dividend income.
Don't worry about trying to accumulate all your shares at once. You can get a little bit at a time through dollar-cost averaging. Start investing with an amount that's comfortable for you, and aim to scoop up shares every month.
Although the example includes only four stocks, you'll be better off adding more stocks to ensure you're not depending on a few dividend-paying stocks to supplement your income. Diversification will be your best friend on this journey. There's always a risk that a company can cut or suspend dividends, so you want to be prepared in case that happens.
Start earning dividend income this year
Your monthly or quarterly dividend income probably won't fund your lifestyle overnight, but it can get you on the path toward multiple streams of income without lifting a finger. All you need to do is determine the type of dividend-paying assets you want to add to your portfolio and develop a strategic plan.
After you hit those two main points, the rest of your dividend journey will be a breeze. You can time your dividend deposits to ensure you are earning more income every month of the year.
