In the last several years, the internet has been inundated with articles and videos about passive income. Many promising wealth through scammy and sketchy means.
Unlike those, we’re going to cover one of the simplest forms of building passive income there is: dividend investing.
First, let’s break down investing into two categories. There are stocks that have dividends and stocks that don’t. Dividend stocks pay you a percentage of annual earnings based on the amount of stock that you own in a specific company. This is in addition to the growth in value of the stocks. Other companies do not provide dividend earnings.
Apple, one of my favorite companies much to the chagrin of my engineering coworkers, pays out a dividend of 0.61% annually according to Google’s most recent dividend yield stat.
If you go to their investing information on their website, you can see exactly how much they paid out per quarter to their shareholders. Anywhere from $0.77 to $0.82 per quarter per share in 2020. At least until they did the four to one stock split in August. So overall, you could expect to receive $2.62 in dividend payout last year per share you owned of apple.
That’s in addition to the 81% increase in stock price that Apple saw in 2020! Obviously, not every year is like 2020 was for Apple. But, the benefit of dividends is that you might get paid regardless of the status of the stock market. It’s not a guarantee but there’s a greater chance of still getting paid if the stock drops.
Dividends in Downturns
Through the 2008 crisis, Apple wasn’t paying dividends to their shareholders. Walmart on the other hand, has increased their annual dividend yield for their shareholders since 1974. Very impressive.
Benefits of Stock Dividend Companies
The benefits of stock dividend companies are a couple fold. For one, as I mentioned before, you can get return from the company from not only dividends but also growth of the stock price.
Two, companies that pay dividends to their shareholders tend to be a bit more conservative in how they run the business. If they promise a specific dividend yield, they must maintain large cash reserves in order to pay their shareholders annually or quarterly.
Also, because they must pay their shareholders, fiscal responsibility must be taken seriously to ensure decisions made don’t risk promised dividends. Which means, dividend stocks tend to be for large companies that are fairly predictable in their growth.
What You Can Do With Earned Dividends
There are a couple things you can do when you are paid dividends. You can receive the dividends in cash and use it as you so choose. Or you can reinvest it into the company.
A recent study by Hartford Funds illustrates the important role dividends play in the S&P 500’s returns. From 1970 through 2019, 78% of the total return of the index can be attributed to reinvested dividends and the power of compounding.
According to the study, $10,000 invested in the S&P 500 in 1970 – with dividends reinvested – would have grown to $1,636,370 by 2019. When disregarding dividends and only considering price appreciation, the $10,000 initial investment in the index increases to just $350,144.US News and World Report
Clearly reinvesting dividends can have a huge impact on your wealth!
How to Invest in Dividend Stocks
Now, I have good news. Yes, you can invest into stock dividend companies through any brokerage like Robinhood. I don’t tend to invest in single stocks because of their volatility. But you can also reap the benefits of dividends by investing in broader range mutual funds or ETFs. I found this out in an incredibly pleasant way last December.
I was checking out my 401k to see what the growth was that month and lo and behold, it had listed within the growth: Dividends and Interest – $914. This was dividends AND interest, so it included the interest earned by the bonds within my blended portfolio. But regardless, that gave a nice boost to the 401k!
Dividends can provide a huge benefit to your investing. I want others to understand how crazy dividends can be in the wealth building equation. So I’ll pass this question onto you: Are you invested in any dividend stocks or were you even aware of these?
I’d love to hear from you in the comments down below!
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