Getting paid to do nothing. It seems unreal. But imagine: collecting checks every month that you can use to spend on anything. And not a gift card, or credit at a store. Cold hard cash.
I am working on achieving a secondary income stream through dividends. In this post, I will cover some basics about dividends. First, I will discuss what exactly dividends are. Second, why this is so important to me, and to young investors. Third, I will discuss some dividend stocks I am interested in. Note: all the stocks I write about are stocks I own.
What is a dividend?
I will answer this by answering another question first: what is a stock? A stock is a piece of ownership of a company. As a way to raise money, companies will sell a piece of ownership and use those proceeds for business operations. This acts as an alternative to borrowing money that must be repaid. Instead, companies do not have to pay back what their shares initially sell for on a set schedule. But they do pay.
See, companies still have to reward shareholders. They do, afterall, own the company, and can vote for new leadership if they are not rewarded financially for owning the stock. While companies can undertake stock buybacks (I might write about this in another article), another way they can reward shareholders is paying a dividend.
A dividend is a payment a company makes to shareholders. While companies don’t have to pay a dividend, it is a big incentive to own a stock, and own a stock for the long haul. The ratio of the dividend payment to its stock price is called the dividend yield. This often ranges from a half to four percent for most companies. This may sound like not that much, but remember, this money comes from the company you own. It is important they retain some earnings, so they can reinvest in the company, and earn more money.
Often, companies pay dividends quarterly. One stock I own, Disney, pays twice a year. Dividend aristocrats are companies that have increased their dividends on an annual basis for at least 25 years. I like dividend aristocrats because they have seen two economic slowdowns and still increased their dividend payments.
Why Invest in Dividend Stocks?
I think dividend stocks are very powerful. Being able to count on stocks that pay dividends provides a peace of mind that your money is working for YOU. Remember, not all stocks pay dividends, and some companies dividend payments are volatile.
On top of that, with your dividend payments, you can turn back around and buy more stocks. Say you own 200 shares of a stock worth $10, so your total equity is $2000. Each stock pays 10 cents of dividends a year. So, after a year, you get paid $20.
What now?
With that $20 of dividends, you can buy two more stocks without using any of your own money! And, by buying more stocks, your dividend payment next year is $20.20!
I know this seems small, but it will keep growing. And if the next year the dividend increases by just one cent, your dividend payments jump to $22.22. You can just keep buying more stocks and growing your dividend payments.
I believe this is important for young investors because we need to establish a solid base of income early in our lives. We face high student loans, rising housing costs, and even less income than our parents. Developing a secondary stream of income is essential to making more money.
My personal strategy is to buy dividend paying stocks until I can get $50 of monthly income from dividends. This is not very much, but this represents a big step for me personally. I plan on reinvesting all this money into dividend paying stocks again, thereby increasing my income even more.
Once I own a large amount of “secondary stocks,” or stocks I bought with only dividends, I will feel good spending this money on anything. But I need to establish a large base first, and that is where I am at right now.
My Favorite Stocks
Here is a partial list of dividend stocks I currently own:
- Exelon- Utility that pays a 3% yield
- AT&T- Telecommunication giant with large cash flows. Raised its dividend for years
- Coca-Cola- One of the most popular dividend stocks. Everyone likes Coca-Cola
- Bank of America- Financial firm with steady business
These are all some stocks just to give you an idea about where to start looking. These have all proven to be solid stocks with high dividends that I can use to grow my portfolio.
I will be looking more at individual stocks in the future, so check back in!
Disclosure: This article is for entertainment purposes. I am not a financial advisor. Consult with a financial professional before making investment decisions. Investments may lose value over time.
Gen Z Finance 