Dividends. I know, I know. But love them or hate them they serve a purpose. For those that don’t know dividends are:
While many types of income require tons of upfront work and have a substantial delay in returns, dividends are different. Below I layout my reasons why my first passive income stream was dividends…
Low Startup Costs:
Its something I hear a lot, “yeah but I don’t have that much.” With a Robinhood account(affiliate link) and $12 you can buy your first stock. Ford. Boasting a 4.8% dividend its a great beginner stock. Its cheap, a stable company, and has a great yield.
Lets do some quick math:
- Say you buy 1 stock of Ford(F)
- As of 5/2/2018 that would be $11.21
- Ford’s dividend payments are every 3 month
- 4.8% of $11.21 is $0.538
- Divide $0.538 by 4 and you get $0.1345 or ~$0.14
For every stock of F you buy you should get payed 14 cents ever 3 months
Which is awesome!
That means you’ll be making 5% every year which will be deposited back into your brokerage account quarterly. You can then use this money to buy more Ford! Or a $.14 of a cheese burger. Or whatever you want. With only about $12 you can start getting payed. *note* As I go into more detail below you can always sell the stock back and make up most if not all of your money.
While $12 is not nothing, its a level of risk that is appropriate for those wanting to better their financial future. If I were telling you to go all in on 33 black at the casino because I just had a feeling, you should walk away quickly. Ford on the other hand is very unlikely to go under. Which means that even if you change your mind, decide this Furious guy is crazy, and want to get out of the dividend game; you can sell back your Ford stock and make up most if not all your money. Looking at a price chart of Ford over the last 5 years we don’t see a huge amount of instability. *Note* I bring up ETFs below!
Low Knowledge Entry Bar:
Unlike day trading, Amazon resale, or snack machines, you only need to basic research to get your feet wet in dividends. There are tons of resources giving you great options for which stocks to look at. Whats even better is tons of research has been done for you. Enter dividend ETFs.These Exchange Traded Funds are just large groups of stocks that are curated and grouped for ease of purchase. They allow you to diversify your holdings so that no one stock crashing can wipe out your account. These funds give quality returns while minimizing risk. A couple that I own are, SPYD and SCHD. They both have low fees while still growing over time. This allows you to see your investment grow while still getting payed.
Now am I saying that you should pour all your money into dividend stocks. No. Im not even saying you should pour alot of money into dividend stocks. Lets say you want a simple $500 a month in payments. For Ford that would mean that you buy 11151 stocks valued at $125,002.71. Definitely dont do that! For one that would leave you way too exposed in one market. For two its not the best return on investment.What I am saying, however, is that dividends get you started. Put some away every month towards a ETF that is focused on dividends and growth like SCHD. Lets do a little math that may be more exciting: Here is an analysis of SCHD:
- You buy 1 SCHD stock each month every month starting May 2018
- SCHD gains 4% each year in value(its been closer to 12% the last 5 years)
- SCHD maintains a 3.16% Div payout
- You can break quarterly div payouts into months by dividing by 3
- You do not reinvest the dividend payouts
- Using the above assumptions by December of 2020 the dividend payouts surpass the cost of the stock
- If desired you could now stop using active income to grow you dividend ETF pool
- In May 2023 the value you have input is surpassed by the dividend payouts
*Your money is growing much faster than the rate you are putting it in*
- At the end of 20 years you will have contributed ~$17,000
- The value of the dividend payments are ~$75,000
This is a increase in value of >425%!
- At the end of the 20 years you will be receiving over $800/month in payments
You get the best of both worlds! Because the ETF is growing with quality stocks the value of your dividend payments also rise. That and you begin to build up that 1st passive income stream. Nothing wrong with that.
If you are looking to start trading head over to my post about Robinhood! It will get you started and it uses dividend ETFs as an example.
If you’d like to see my calculations and play with the numbers yourself here is a google doc link.