The stock market has grown in leaps and bounds since its fledgling days circa 1602. With this growth, there’s the capacity for anyone who’s interested to make passive income, aka, money that you can make with minimal investment in terms of time and effort.
However, despite the allure and the freedom of making money in your sleep, the stock world can be a money pit. Matter of fact, the Financial Times estimates that about 70% of DIY traders lose their money while trading.
To minimize these risks, it’ll be a good idea to know the right way to earn passive income from stocks. This article will help you with that. So, start here.
Understand Dividend Yield
So, what’s a dividend yield? This is a proportion of a security’s market value that’s returned to shareholders (you, in this case) through regular cash payments.
Say, for example, you’ve invested in a company trading at USD$100 per share and issuing USD$5 annual dividends per share. By dividing the USD$5 distributed income by the USD$100 share price, you can get a smooth 5% dividend yield.
Now, at face value, a higher yield may seem more attractive. But those who’ve been in this game long enough know that digging deeper is a great idea.
The point? To assess the chosen company’s enduring capability and willingness to continue meeting dividend obligations. Sometimes things go the way you may not expect. The market can change, and the financials or management priorities can shift.
That said, having a good grasp of this seemingly simple dividend yield metric can give you some pretty sweet rewards. Looking to get started? How about you enroll to for a reputable stocks course to learn the ins and outs?
Focus on Dividend Sustainability
Smart investors often go for companies with a strong history of paying dividends and regularly increasing them, even when the market’ s rough. Take Coca-Cola as an example.
This company’s been raising its dividend payments for 60+ years. This consistent growth in dividends shows that Coca-Cola is a financially solid company and one that’s likely to give back to its investors.
So, by checking how long and how well a company has been able to maintain its dividend payments, you can get a better understanding of the company’s true values and commitment.
Imagine having a portfolio filled with such reliable dividend-paying companies? It can take you a long way towards building a stable and long-term source of passive income.
Diversify Your Dividend Portfolio
Shrewd investors know to cast their nets wide. How about you go for the steady, reliable ships like General Mills and the swift, innovative vessels like Apple?
The point? Creating a portfolio that stands robust, rain or shine. It’s like planting different crops in your financial garden. Some provide immediate yield, while others promise future growth.
This approach can make sure that regardless of what happens in the market, your investment vessel stays buoyant, thanks to a spectrum of dividends from various industry waters.
Reinvest Dividends For Compounding
Those with experience in the dividends business will tell you that the wise play the long game. So, how about you use your dividends to buy more shares?
Imagine your monthly dividend as seeds – say, USD$50 from a stalwart like Coca-Cola. Instead of spending this bounty, consider replanting it, buying more shares.
It’s like nurturing a tree that, in turn, bears more fruit. Over time, this reinvestment grows your share and your basket of dividends becomes ever larger, thanks to compounding.
Consider Tax Implications
In the U.S., there are two types of dividends: “qualified” and “non-qualified.”
Let’s say you buy shares in a famous U.S. company like Apple or Microsoft. If you keep these shares for at least 60 days during a special 121-day period (which starts 60 days before the dividend is set to be paid), then your dividends are “qualified.”
This is good because qualified dividends are taxed less, just like lower taxes on profits from selling something you’ve owned for a long time.
Then there are dividends that don’t get this special treatment. A common example is money you get from REITs (Real Estate Investment Trusts). These dividends are usually “non-qualified” because REITs don’t pay certain corporate taxes, given that they hand out most of their earnings to shareholders.
In the UK, things are a bit different. Dividends get a bit of a tax break. There’s an amount you can earn in dividends that’s tax-free. If you earn more than this, the tax rate on your dividends depends on your overall income level.
Knowing these tax arrangements can guide you towards the help you earn the best dividends from your stocks portfolio.
Start Earning Today
As you’ve discovered by now, earning passive income from stocks is a possibility, but you’ll need to know how to do it right. You’ve got some great tips to get you started. Where you find it difficult, don’t feel shy.
Reach out to the pros who’ve been making waves in this pool for a while. Their wisdom can go a long way. So, get started today and reap the best of this world.
Also read: 5 Tips for Using Payday Loans Responsibly
