'Generate income without a paycheck': How dividend investing can make you money while you sleep (2024)

Financial sites across internet will tell you how you can earn passive income, but let's be honest — a lot of what's touted as passive income isn't actually passive.

Take real estate investing. Once you buy a rental property, the thinking goes, your renters cover your mortgage and then some. Every time you hike the rent, that's more profit in your pocket. Any honest real estate investor will tell you, however, that being a landlord is work — oftentimes quite a lot of it.

If you want to generate income that's truly passive, consider dividend investing. While relying on cash payouts from a stock portfolio is a common strategy for those nearing and in retirement, anyone can build an equity income portfolio, says Brian Bollinger, president of Simply Safe Dividends.

The goal for many users of his site, old and young, says Bollinger: "Generate income without a paycheck."

Here's the general gist. You invest in companies that regularly distribute a certain amount of money to their shareholders. If all goes well, you collect a growing pile cash each year while the stocks you own appreciate in value.

How dividend investing provides income

A quick refresher on how dividends work: Companies that earn excess profit can choose to return some of that money to their shareholders, as a sort of thank you, in the form of a regular cash payout. Some investors use these dividends as a form of income. Other, usually longer-term investors like to take those dividend payments and reinvest them, thereby boosting the return they earn on the stock.

For both types of investors, determining the attractiveness of a dividend comes down to the stock's yield, found by dividing the amount of money an investor receives from a single share into the stock's share price. If one share of stock costs $100 and comes with a $1 annual payout (a common configuration might be quarterly payments of 25 cents), its dividend yield is 1%.

Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.

Dividend income strategies to consider

Whether you're choosing your own dividend stocks or investing through a mutual fund or ETF, you'd generally be wise to follow one of these two dividend strategies that aligns with your particular needs, experts say.

1. Higher yield

Investors looking to maximize their income may target stocks or funds that pay a high yield.

While the income such stocks offer can look juicy — individual stocks in the S&P 500 currently yield as high as 9.7% — you don't have to think too hard about the calculation above to see why some yields are higher than others. The more a stock falls in price, the higher its yield climbs.

Companies that are in trouble not only provide shaky returns, but may be forced to cut the dividend as a result of poor financial results.

"Stuff that's over 5% or 6% probably isn't a good idea if you're a risk-averse investor," says Bollinger. "Even if the dividend does end up staying stable, it's pretty unlikely to grow."

One way to defray some of the risk is to invest in a broad basket of dividend stocks, says Todd Rosenbluth, head of research at VettaFi. "The benefits of diversification become really important," he says. "Owning dividend stocks in an ETF can make a lot of sense for equity income-oriented investors."

2. Dividend growth

Some dividend investors are happy to take a lower yield — maybe even not much higher than the S&P 500's — to invest in companies that steadily grow their payout.

"I generally like to advocate for an approach of targeting great businesses that might pay closer to a 3% to 4% dividend yield," says Bollinger. Such companies often steadily grow their payout, which boosts your annual income stream — a move that helps offset the effects of inflation, he says.

Among companies with smaller yields, "you're usually looking at safer companies with safer payouts as well," Bollinger says.

Not all stocks that yield in this range will grow their payout, and pros like Bollinger have created tools to help determine the whether a company is likely to, taking into account fundamental factors such as earnings growth, debt and trajectory of cash flows.

Short of that, many investors seeking steady dividend growth look to the past, relying on companies with a long history of dividend growth. The S&P Dividend Aristocrats index for instance, includes companies in the broader index that have hiked their dividend for at least 25 consecutive years. Stocks in the index currently yield 2.5%.

Many of these firms are established, financially mature companies, says Bollinger. Building a diversified portfolio of them, he says, can give you peace of mind that you're building an underlying portfolio that will continue to grow alongside an expanding pile of passive income — regardless of swings in the market.

"When stock prices fall, it's so easy to panic, but dividend investing can overcome that because you're just trying to stay focused on your income stream," says Bollinger. "You don't care so much about the markets' short-term ups and downs anymore."

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'Generate income without a paycheck': How dividend investing can make you money while you sleep (2024)


How to generate dividend income? ›

In dividend investing, you purchase stocks of companies that give regular payouts to shareholders through dividends. By adopting this strategy, you can generate passive income and earn a steady stream of cash flow over time.

How does someone make money on stocks that don t pay dividends? ›

Investing in Stocks without Dividends

Companies that don't pay dividends on stocks are typically reinvesting the money that might otherwise go to dividend payments into the expansion and overall growth of the company. This means that, over time, their share prices are likely to appreciate in value.

Are dividends a good way to make money? ›

A dividend is typically a cash payout for investors made quarterly but sometimes annually. Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.

How do you generate passive income with dividend investing? ›

Investing in dividend stocks is one of the easier ways to generate passive income. The only work you need to do is build a diversified portfolio of high-quality, high-yielding dividend-paying stocks. You can then sit back and watch the dividend income flow into your account.

How do dividends provide income? ›

Dividends are payments a company makes to share profits with its stockholders. They're one of the ways investors can earn a regular return from investing in stocks. Dividends can be paid out in cash, or they can come in the form of additional shares. This type of dividend is known as a stock dividend.

Which income is dividend income? ›

Dividend income is the amount distributed to the company's shareholders. The dividends are distributed from the company's earnings or profits and are a way to earn money from owned shares. In simple words, it is a reward given by the company to its shareholders for investing in their shares.

What's the highest dividend paying stock? ›

20 high-dividend stocks
CompanyDividend Yield
CVR Energy Inc (CVI)9.65%
Civitas Resources Inc (CIVI)9.65%
Altria Group Inc. (MO)8.73%
Evolution Petroleum Corporation (EPM)8.67%
17 more rows

Can you make a living off stock dividends? ›

Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.

Are there socks that don't pay dividends? ›

A company that is still growing rapidly usually won't pay dividends because it wants to invest as much as possible into further growth. Mature firms that believe they can increase value by reinvesting their earnings will choose not to pay dividends.

How much do I need to invest to get $1000 a month in dividends? ›

The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.

How to make $1000 a month passive income? ›

Passive Income: 7 Ways To Make an Extra $1,000 a Month
  1. Buy US Treasuries. U.S. Treasuries are still paying attractive yields on short-term investments. ...
  2. Rent Out Your Yard. ...
  3. Rent Out Your Car. ...
  4. Rental Real Estate. ...
  5. Publish an E-Book. ...
  6. Become an Affiliate. ...
  7. Sell an Online Course. ...
  8. Bottom Line.
Apr 18, 2024

What is the fastest way to grow dividend income? ›

Setting Up Your Portfolio
  1. Diversify your holdings of good stocks. ...
  2. Diversify your weighting to include five to seven industries. ...
  3. Choose financial stability over growth. ...
  4. Find companies with modest payout ratios. ...
  5. Find companies with a long history of raising their dividends. ...
  6. Reinvest the dividends.

Are dividends passive income IRS? ›

For purposes of defining a business enterprise as the active conduct of a trade or business, it is important to distinguish gross income from active conduct of a business from income derived from passive sources. Gross income from passive sources includes: Dividends, interest, and annuities.

How do you reinvest dividend income? ›

How does dividend reinvestment work? Dividend reinvestment is an automatic process that an investor can set up through their brokerage account. Once set up, the broker will automatically reinvest dividend payments of stocks set up for reinvestment to buy more shares of that stock with the dividend payment.

How to make $1,000 in dividends every month? ›

To generate $1,000 per month in dividends, you'll need to build a portfolio of stocks that will produce at least $12,000 in dividends on an annual basis. Using an average dividend yield of 3% per year, you'll need a portfolio of $400,000 to generate that net income ($400,000 X 3% = $12,000).

How many dividends does $1 million dollars make? ›

Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.

How to make 5k a month in dividends? ›

To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.

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