In todays post, I’m going to be sharing with you how you can start making passive income by investing into dividend paying stocks.
The way I’m going to construct this article, is in 2 different steps:
1. What exactly is a dividend and what are dividend paying companies?
2. How much you can actually make money in passive income from dividend paying stocks?
What is a Dividend Stock?
So basically, when you invest into the stock market, the are two main ways that you can money.
1. You place your investment, you wait for the stock price to hopefully go up over time, and then you sell your stock for a profit.
2. You can go with dividend investments, where you still can make money from the stock price going up, but at the same time the company will pay you back a set amount of their profits every single year in the form of a dividend payment.
Basically, the best way to describe a dividend payment is by saying it’s just like receiving a thank you card each year with a bit of money inside from the company to say thanks for investing into us.
But why do they need to thank us in the first place?
Well, if you are someone that invests into a company, you are essentially giving that company money to invest into growing their business, essentially, allowing them to make more money and they want you to have a share of the profits.
Okay, so let’s take a real life example of how this actually works.
Let’s say we invested into Coca Cola which is in fact a dividend paying stock, and lets go by the current share price of £55.29 and I know that they currently pay a dividend of 3.04% of that share price.
What you can see here is that I would get £1.68 paid to me every year in dividend payments per share and let’s say I owned £1000 worth of that stock, that would be £30.40 in passive income I would receive just in dividend payments.
Now, whilst this doesn’t sound too much right now, over a long period of time, these dividends could potentially be re invested into buying more shares creating what I like to call a snowball effect and you would be really surprised how much the passive income you make, actually starts to build up.
Not every company pays a dividend though?
Okay, so that’s basically what a dividend is. However, at the start of this post, I mentioned that not all companies actually pay dividends. This is for a number of reasons and the two main ones I come across is.
1. They might not be profitable yet as they are a brand new business.
2. They might want to retain more of their profits to reinvest into growing the company.
And what I’m going to do, is show you where you can actually go to see whether the company you want to invest into actually pays one and if they do, how much they actually pay every year.
As you can see above, this is the stock summary of a that you can simply search for in Google. In this example we are using Apple (APPL) and to see how much they pay as a dividend, you head down to the Div Yield section and as you can see, Apple pays a 0.67% dividend from their share price every single year.
Of course, if a company didn’t pay a dividend, this field would just be blank.
How much can you make in passive income from dividends?
There are basically two ways in which you can build a really nice income from this.
1.You can have an extremely large sum of money saved up you that can invest straight away.
If you are lucky enough to have a spare £800,000 to hand, if you invested into a stock that returned a 5% dividend yield each year. That would be £40,000 you would receive in passive dividend payments each year.
2.You can build up a dividend portfolio over time and re-invest your dividends into buying more stocks that pay dividends.
Now, I’m sure we would much rather have option 1, but for 99% of the population, this simple won’t be the case to start. However, it’s for sure not out of reach in the future and the best way to get there is by building a solid dividend portfolio over a long period of time by consistently investing and re-investing into dividend paying stocks.
Doing this over time will help you take advantage of compound interest. One example of compound interest is that, if you were to invest just £500 a month for 30 years into an index fund that returns 10% a year, at the end of that 20 years you will have £1,130,243.96 with £950,243.96 of that figure being interest.
Absolutely mind blowing!
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Other than that, I hope found this article valuable and I wish you all the best with your dividend investing journey!