Dividend Investing For Passive Income

One of the ways that you can earn passive income is through dividend investing. Companies that pay dividends actually pay out a portion of their profits to shareholders. If you invest in a company that pays dividends, you receive a dividend monthly, quarterly, semi-annually or yearly (depending on how the company does things). These dividends are paid out to shareholders, and are different from earnings from selling or trading stock in the company.

Dividends can be incorporated into a long-term plan for yielding wealth, as well as provide regular income. Indeed, there are some investors that invest solely in dividend paying stocks, watching their portfolios grow over time and receiving an income stream when dividends are paid out. There are some who manage this well enough that dividends provide a large portion of their income.

DRIPs


It is possible to compound the earnings you receive from dividends through programs known as dividend reinvestment plans (DRIPs). DRIPs are set up with some dividend paying companies who take your dividends and automatically reinvest with the company, buying more stock. I have some DRIPs in my Roth IRA. Every time a dividend is paid, it is automatically reinvested, allowing me to buy a couple extra shares of stock. It’s basically like getting free shares. And it’s a good way for me to automatically increase my investment.

For the most part, though, dividend investing isn’t going to result in immediate results. In this economy, you might disappointed (although there are some companies that have actually increased their dividends). Dividend investing — especially when you make use of DRIPs — are part of a long-term strategy. However, the cumulative effect can provide a reasonable passive income for those with the patience to make it work.

Personal Finance - What They Don't Teach You In School

Personal finance looks at how your money and future is managed.

Personal finance, by definition, is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

The Principles of Finance defined:

Finance is the set of activities dealing with the management of funds. More specifically, it is the decision of collection and use of funds. It is a branch of economics that studies the management of money and other assets.

Finance is also the science and art of determining if the funds of an organization are being used properly.

In fact, when you get right down to it, there are three broad types of income you can generate:

1. Earned Income
2. Portfolio Income
3. Passive Income

Any money you ever make (other than maybe winning the lottery or receiving an inheritance) will fall into one of these income categories. And each income category has its own set of benefits and drawbacks.

Earned Income

Earned income is any income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own “consulting”) is considered earned income.

Some activities that generate earned income include:

* Working a job
* Owning a small business
* Consulting
* Gambling
* Any other activity that pays based on time/effort spent

While earned income is the most common mechanism for making money, its obvious downside is that once you stop working, you stop making money. Additionally, because the amount of money that is made through earned income is directly proportional to the time and effort you spend working, it’s difficult for someone to make more earned income without either learning a new (or more valuable) skill or working longer hours. Additionally, earned income is taxed at a higher rate than any other type of income.

One huge benefit of earned income over the other income types is that you generally don’t need any startup capital in order to make earned income, which explains why most people rely on earned income from the start of their working life. In fact, earned income is a great way to start your investing career, as it allows you to save up cash that will help you generate the other two types of income…

Portfolio Income

Portfolio income is any income generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as “capital gains,” because that’s how the money is taxed by the federal government.

Some activities that generate portfolio income include:

* Trading (buying/selling) Paper Assets — Paper assets refer to things like stocks, bonds, mutual funds, ETFs, CDs, T-bills, currencies or other types of futures/derivatives. Stock market investing is the most common generator of portfolio income
* Buying and Selling Real Estate (specifically the profit from the sale)
* Buying and Selling of any other Assets — Antiques or cars, for example, or other types of collectibles that have appreciated in value

Portfolio income certainly has some advantages over earned income. Once you have the knowledge and experience to generate portfolio income on a consistent basis, you can continually reap the benefits (compound your return) by reinvesting after each sale. Additionally, any portfolio assets held long-term are generally taxed at a lower rate.

Passive Income

Passive income is money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income.

Some activities that generate passive income include:

* Rental Income from Real Estate
* Business Income (assuming it’s not earned based on amount of time/effort spent — that would be Earned Income)
* Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc
* Affiliate or Multi-Level Marketing
* Dividends

There are some major benefits to passive income over the other two types of income:

* Passive income is generally recurring income; once the investment is made, and assuming it is a good investment, the income will continue to come in month-after-month or year-after-year, with little additional work by you. This means that you can essentially “retire” and still continue to grow your net worth.

* Investments that generate passive income usually allow the owners active control over the investment. For example, if you owned an apartment building or a corporation, you would have say in the day-to-day operations that would ultimately impact the success of your investment.

* Passive income investments often allow for the most favorable tax treatment. Corporations can use profits to invest in other passive investments (real estate, for example), and take tax deductions in the process. And real estate can be “traded” for larger real estate, with taxes deferred indefinitely.

* Because it is generally possible to closely approximate the return (or at least the risk) you can expect from passive investments, these investments can often be funded using borrowed money. For example, a good business plan can attract angel funding or venture capital money. And real estate can often be acquired with a small down payment (20% or less in some cases) with the majority of the money borrowed

As you might suspect from the above overview, many people consider passive income the holy grail of investing, and the key to long-term wealth.