Passive income is income stream without having to actively invest in time and effort. It’s like money growing from a tree. Sounds nice, right? You do need to plant the trees first before it starts sprouting money for you. Today I’m focusing on dividends as a form of passive income. There are three reasons I like about dividends.
Number one: It’s predictable.
Dividends are the regular payout by a company when you own shares of its stock. Most dividends are paid out quarterly, and some, like Realty Income (ticker O), pay dividends monthly. As long as companies have stable cashflow, they almost don’t skip dividends. It’s like a regular paycheck handed over to you without you having to do anything.
Number two: it can be pretty generous amount.
Some companies pay quite generous dividends. For example, banks such as Morgan Stanley (ticker MS), and energy companies such as Chevron (ticker CVX) pay close to 4% dividends. REITs (Real Estate Investment Trusts) are another great source of dividends. Almost all of them pay sizable dividends. Companies such as Altria Group (ticker MO) pay close to 8% dividends! The key is to find companies with stable earnings so they can keep printing money for you even while you are sleeping.
Number three: Dividends grow over time
As companies profits grow, they tend to return extra profits back to shareholders. So it’s quite common to see dividends grow at a stable rate and some companies such as Lowes (ticker LOW) grow over 18% annually in the past 5 years. If you keep holding the stock and let the dividends grow over time, the compounding effect can get you a fairly sizable amount, just like a snowball. For example, if you own $1000 of LOW, at 2% dividend, you will be paid with $20 the first year. By year 5, you will collect total dividends of $119. If you buy additional $1000 of LOW every year, then by year 5, your total dividends grow to $361! That’s how Warren Buffet, the Oracle of Omaha collects his billion dollar dividends every year!