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Friday, February 18, 2011

Build Passive Income with Dividend Stocks

Passive income is the Holy Grail of many who fall into the category of “financially savvy.” Indeed, the ability to maximize money – without having to do a great deal of additional active work – is a concept that most people can cherish. One of the ways that you can cultivate a passive income stream is to make use of dividend stocks.

Use Dividend Stocks to Create a Passive Income Stream

In order to create a passive income stream with high yield stocks, you will need to make sure that the money is coming directly to you, rather than being reinvested.
You can have the money sent to you in the form of a check, or directly deposited into a bank account. The idea is to continue building up your holdings so that your dividends increase, eventually providing you with regular income – without you having to do extra work. There are two main ways you can build up your dividend stock holdings:

1. Lump sum

If you have a fairly large chunk of capital, you can buy a large number of shares in a company that pays dividends to stockholders. This money sits there, possibly earning a return if the share prices increases, and you get the added bonus of receiving a regular dividend payment. There is nothing else you need to do.

2. Dollar cost averaging

Perhaps you don’t have enough capital to buy a large amount of shares. In this case, you can build your holdings gradually. Put in what you can each month, and you will gradually increase your shares in the dividend paying company. After a while, you will notice your dividend checks getting bigger. Eventually, you will have a large enough portfolio to support a steady income stream, and you can stop investing new money if you want.

Remember, though, that you need to keep a few things in mind. You will have to pay taxes on your dividend earnings, so make sure you understand how you will be taxed. Additionally, companies can change the dividends they pay out, so your income can be reduced if a company lowers its pay out. Remember, too, that you could lose money if the price of the stock you are holding tanks. Most companies that offer dividends, though, are fairly stable.

In the end, dividend stocks can be a good way to cultivate a passive income stream that can keep offering you returns for years. No need to do extra work.

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