In my quest to find good sources of passive income over the past few years, I realized that dividend paying stocks are an awesome way to build my own paycheck. As a matter of fact, I was was intrigued enough to try it for real, and is was stunningly simple. Over the course of four months, I made about $2000 with $40k invested – and that was just being conservative. You could do much better if you’re willing to take on more risk, and the gains could be higher still if you have a huge amount of money to invest.
How I did it:
My trading style is somewhat conservative compared to others, so the bulk of my investments were large blue-chip American companies with a long history of stability and growth (ATT, GE, PFE, JNJ). I also mixed in a few medium sized stocks such as VZ, MO, and DUK. And just for kicks I selected one smaller stock with a crazy high dividend yield: CIM. I forgot what the dividend yield was at the time, but it was really generous.
I invested $5,000 in each one and just let it ride. I didn’t plan my entry, I didn’t average in – I just bought everything at once and hoped for the best. My thinking was that the dividends would offset any losses over time, so timing the perfect entry wasn’t that important to me.
I held all positions for four months, earned the dividends, then sold everything at the same time. This was January 2012 and the markets had come up significantly over the course of my holding, so not only did I earn dividends, I got to pocket the price difference as well. Not a bad four month trade! I should note that I would have held all of these long term if the markets had done the opposite and gone down while I was holding. But I was looking at really strong gains PLUS the dividend earnings so it was an easy decision to sell.
Pros and cons to investing in dividend stocks
Just like any investment, there are risks involved. While dividend investing isn’t as risky as some other types of trading, you can still lose all your money if a company goes bankrupt.
- This is a very easy way to earn passive income. Investing in large blue chip companies that have been around for ages with a history of an increasing dividend is a complete no-brainer.
- You can set up a reinvestment plan (DRIP) where all of your dividend payments are automatically used to buy more shares at the current price. This is an incredible way to build your passive income (and wealth) over time.
- It takes a lot of money to see any significant dividend earnings. No, you won’t earn enough to retire with a $10,000 investment. Not instantly at least…
- Beware of stocks that offer an incredibly high dividend yield – it’s a clue that the company is cash-poor and desperate for investors. That CIM stock I mentioned above fit this category – and the stock also lost 50% of it’s value during the time I held it! I actually lost money on that investment.
- This is a boring way to gain financial independence. Most dividend stocks pay out every quarter as opposed to monthly.
I like dividend investing as part of a combination with other passive monthly income methods, but not as a primary source. While the income is dependable, it takes a lot of capital to earn significant quarterly payouts – money that I would rather use for other investments that yield larger returns.