Wohoo! Another quarter, another predictable payment of dividend income!
Let’s see how 2017 is developing so far. To the numbers!
Why I Love Dividend Income
Dividend stocks are a great way to generate passive income. Without getting into too much detail, when you buy a dividend stock, like AT&T (T), the company pays you a dividend for each share you own.
How big a dividend? Well, that depends on the stock.
To simplify drastically, dividend yield (dividend divided by stock price) has been in the low single digits, e.g. Dow Industrials historically averages 3.2%, so a $100 investment would return you $3.20 a year, but it varies depending on the economy.
But the most important bit – with dividend stocks you get paid every day whether you work or not.
Think about that for a moment. Every day. Working or not. Sick or well. At the beach or asleep in bed.
Paid. Paid. Oh yes, and paid.
It’s some of the easiest passive income you can earn. No troublesome tenants from real estate investments. Low risk of default, unlike peer to peer lending. Somewhat reasonable returns, at least compared to what you could earn from a CD. It’s a great component of your total investment portfolio.
Best of all, you can accelerate your dividend income with two force multipliers: reinvested dividends and dividend growth.
Reinvested dividends are straightforward. Every dividend payment you receive each quarter you use to buy more stock. Most brokers will do this automatically, with no transaction fees. The more stock you own, the larger your total dividend payment.
Dividend growth is like inflation but in your favor. Companies want you to invest in their stock, so they make it more attractive by raising the dividend payment every year. This varies from stock to stock and from year to year, but the S & P 500 is currently averaging 5.8%.
Combine the two with time and you can really watch your income grow.
And let’s not forget the capital appreciation. Stock prices are unpredictable. Even as the dividends continue unabated (typically), the market value of the stock providing the dividend stream can vary wildly. Sometimes up, sometimes down. For example, this quarter the changes in two of my stocks balanced out, while one was up almost 25% (compared to the S&P 500 index only being up around 4% over the same period). It’s a wild ride, but always nice when it’s going in the positive direction.
All you have to do is make that first investment.
Dividend Income Report
So how my dividend stocks been doing lately? Just fine.
My current portfolio is the same as in my last update:
- AT&T (T)
- Clorox (CLX)
- Leggett & Platt (LEG)
- Olin Corp (OLN)
For 2017-Q1, they earned me $1,588 in quarterly dividends (a projected average annual yield of 3.4%). This is the equivalent of $6,353 in annual dividends or $17 a day.
It’s not a substantial sum but, I was paid $17 today for doing absolutely nothing.
And here comes another $17 tomorrow. And the day after that.
It may not seem like much, especially when compared to my average daily expenses. But in time, the trickle will become the stream that carries me into a secure retirement.
Financial Freedom Ratio
A great way of looking at your passive income streams is how far along they get you on the path to financial freedom – a time when your passive income exceeds your expenses and you no longer have to work for a living. I call this the financial freedom ratio or passive income divided by monthly expenses. When you reach a ratio of 1, or 100%, congratulations, you’re financially free!
On average, my monthly expenses are around $6,000 (boy, that mortgage takes a bite!). With $529.33 in monthly dividends, my dividend income gives me a financial freedom ratio of 8.8% – still a long way from my goal.
While it’s great to see the steady income trickling in, and the dividends and dividend income steadily growing, it is a slow process. On the plus side, it is more exciting than watching paint dry, since paint doesn’t pay you money, but it can be hard to get excited about it.
I’m planning some additional purchases soon. Between IRA contributions and 401k rollovers, there’s some cash sitting idle that needs a new home. Just need to take the time to investigate a few stocks and decide where to invest next. Hopefully next report will show a jump in dividends, or at least a new position or 3 in my portfolio.
Readers: Do you invest in dividend stocks? Why or why not? Tell us your story in a comment below.
Photo of stacked coins courtesy of Pexels.