Passive Income don’t usually fall from the sky. It takes work to get passive income. At least initially.
I’ll be the first to admit that passive income is a great thing. One passive income begins and money starts to come in, there is the sensation “Oh! Wonderful! Free money!” But it isn’t “free.”
Let’s look at a few types of income considered passive.
Real Estate. Supposed you buy some rental income real estate. Your goal is to rent out the property to get income. To be successful, you must cover all costs from the rental income. You must pay real estate taxes. You must handle all repairs. You must deal with all issues relating to tenants. When tenants move, you must prepare the property for new tenants, you must advertise for new tenants, you must screen prospective tenants. These are not passive activities.
Business. Suppose you start a small business. Nothing about operating a business is passive. Any small business owner will tell you that you are active every day all day.
Dividends. While dividend investing is the ultimate passive income method, there are a few thing to keep in mind. Of course, you must pay taxes on your income. And there are other considerations.
It takes work to get the dividends. A person needs to trade money for stocks that pay dividends, and that in most cases means first, trading labor for income, then second, trading some of that income for stocks. When trading labor for income one pays taxes, so one cannot trade 100% of one’s income for stock. Secondly, dividends paid are at first a small percentage of the overall price paid for the stock.
The current average dividend yield for all stocks in the Dow Jones Industrial Averge is under 2%. The current average dividend yield for all stocks in the Standard & Poors 500 is under 2%. While these yields vary, and each stock’s yield fluctuates based on the stock’s price, we can see that the dividend income for newly purchased shares is not a major percentage of their cost. It is possible to get more than these 2% averages, but the higher you go the riskier the underlying assets. Chasing yield is a dangerous activity.
So when starting, the return of dividend income is relatively small. This is both good and bad. We can say it is “bad” in that it is small percentage of the initial cost. We can say “good” for several reasons. First, the low yield it does not attract the worst of speculators. Secondly, one’s income builds slowly, either through regular dividend increases or reinvestment. Over longer time, one’s income can approach or exceed the initial investment. Thirdly, if one is reinvesting dividends, then one’s ownership increases with each dividend payment.
What To Do
There are three possibilities when dealing with dividends. First, one can spend the dividend income. Second, one can reinvest the dividends. Thirdly, only can use the dividend income to buy other dividend-producing assets. (I generally use a combination of the second and third items.)
Not Much
While stated above are a few reasons why dividend investing is not totally passive, it is as close to totally passive as one could get. Once you own some dividend-paying stock, your major consideration is what to do with the dividends, There’s no much else.
Dividend Starts
Getting started is the hardest part. Don’t wait for later.
What Dividends Have Given Me
Owning some stock that pays dividends has given me an immeasurable comfort. The fear of running out of money has been basically banished from my life. I suppose things could go wrong someday, but at this time, I am free of that potential disaster. So one major result of my dividend investing is peace of mind.
Started on you way to passive income? You can tell me here.
The painting “Watson and the Shark” was painted by John Singleton Copley, and first displayed at the Royal Academy, London, in 1778. It is currently on display at the National Gallery of Art, Washington, D.C.
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