How to make money with stock dividends.
ASTORIA, NYC- A little over two years ago I began investing in stocks. This was my second go-around at this income-generating method and I was intent on doing a better job of it than I did the first time … when I basically gave away $500 thinking I could outsmart the penny stock market.
Since my return, I’ve utilized a few different strategies: swing trading, selling options, and aggressive dividend investing. The first two strategies, I found, are basically real jobs, and the amount of time that I needed to put into it really didn’t match how much time I wanted to put into — although I did really enjoy learning the nuances of options trading.
My bread and butter from the start has always been dividends. There was just something about sitting back, doing ABSOLUTELY nothing, and making money that really appeals to the traveler. For hundreds of years vagabonds have been coming up with grafts to work less and travel more, and this ethic is at the core of the profession. There is perhaps no better graft than dividend income.
All travelers speak — or should be speaking — about ways to generate passive income. While active income is good (and at times often necessary) it has the disadvantage of being short lived. You are essentially trading your time for money, money for time. Once the funds are gone you either have to go back to work again … or simply keep working all the time like a digital nomad or remote worker, which sounds appealing until you actually live it.
With passive income you put in the time in the beginning and then just sit back and rake in the proceeds for as long as the graft remains good. Ideally, you want your passive income streams to continue flowing for years or even decades … There is just something to be said for living off of work you did twenty years ago. With passive income, you can essentially be getting paid while you sleep on airplanes, rummage through a new city, or drink beer in a sidewalk cafe. I know that we’re in the middle of a digital nomad revolution, but not working should once again become a hallmark of the traveling life.
Dividends are among the purest sources of passive income. All you have to do is buy stocks and then collect money. It’s very literally buying income.
Other forms of pure passive income:
- Writing books.
- Blogs that are funded via passive advertising or affiliate programs.
- Films and videos that you can sell through a variety of platforms or upload to YouTube or stock footage sites.
- Rental properties or AirBnb’s where you have a custodian or company taking care of everything.
- Create courses and sell them.
I call my dividend investing strategy aggressive for a reason: I’m looking for an average of 8-10% earnings rather than the conventional 2-3%. I want to make around $1,000 for every $10,000 I have invested each year. If you take the well-trod road with this and focus on the “Dividend aristocrats” — old, established companies that have been incrementally increasing their dividends for decades — you’re only making $200-$300 yearly for ever $10,000 invested. That’s not going to cut it unless you have a million or two lying around to invest. My goal is to eventually make around $5,000 a month, so that’s going to take around $650k … which is actually doable over the long-term.
What is a dividend yield?
The dividend yield is the percentage that a company pays out in dividend payments per year relative to their stock price. So if a stock is priced at $10 per share and it pays a 10% yield it would pay out $1 per year divided up in quarterly or monthly payments.
The dividend yield is a number that’s usually always going up and down depending on stock price and also how much a company decides to pay in dividends, which can change throughout the year.
While my strategy is aggressive it isn’t necessarily risky … at least relatively speaking. I spread my investments out across a wide variety of sectors — oil, housing, tech, minerals, and finance — and aim to have a balance of different dividend paying investment types — stocks, ETFs, REITs, BDCs, covered call ETFs, etc. Although I do need to monitor the market and my investments a little more than I would otherwise.
While I’m more interested in generating income and stock price isn’t the biggest priority for me, I generally like to employ a buy low and hold strategy. So I look for sectors that are currently down and I focus on buying in them, as this allows me to buy more stocks at a higher dividend yield (ideally) and increases value over the long-term. During the pandemic oil and housing (and everything else) were getting killed so I primarily bought oil and housing. When housing was again getting killed recently I bought housing. When the value of a sector goes down it essentially goes on sale for the dividend investor.
For the most part, when I put money into a dividend stocks I aim to hold it for many years. My goal is to collect dividends, not trade. Ideally. Although I have to admit that I do sometimes employ a little swing trading to the strategy to boost my payout ratio when there’s a juicy opportunity to do so.
For example, I bought Exxon Mobile for $40 per share during the pandemic and its dividend payout was around nine percent. Not bad. But when the stock skyrocketed over $100 it’s dividend payout dropped to 3%. While I’m still technically still making nine percent based on my cost basis — which is nothing to complain about — I knew I could maximize my money by taking profits and moving that money into investments that are paying 8-10%, thereby increasing my income by 5-8%. However, I only do this when there are big plays to be made … if you do this too much and constantly abandoned investments for higher yields you’d end up with a pretty top heavy portfolio. Like all types of investment, the key word is balance.
I don’t want to be watching stock tickers all day. I’m not a trader — when the stock price goes down there’s not inherently a cause for concern, when they go up there’s no reason to get excited. I’m into it for the income. I want to set it, forget it, live life, and profit with as little effort as possible. I log into my stock account one to three times per week, check how things are going, and reinvest my dividends.
There are two stages of dividend income investing: building enough of a portfolio so that you make adequate income and taking that income and spending it. I could conceivably live abroad on the dividend income that I’m making now but that would mean ending the growth of my portfolio, which is much too early to do. Right now, I’m making around $600 per month. I want to make nearly ten times this, so I’m taking whatever I get paid and I reinvest it into more dividend plays. The idea is to compound the investment and to get that snowball effect, which should grow larger and larger with time.
Dividends are a long-term strategy
I hope to be able to live off of dividend income completely in ten to twenty years. Unless you’re loaded and can toss in a million dollars at the beginning, this is a strategy that’s going to take a large amount of time to come to fruition. This isn’t like writing a book and watching the passive income drip in right away. No, it’s something that you build over time and then one day pull the lever and live well off of doing nothing.
Because of this, age is a big factor in who should employ this strategy. If you’re 60 and don’t have a mound of cash up front, this may not be for you — although it is an excellent strategy for those who are older and want to maintain their wealth while living off of it too.
Ideally, if you have to build your portfolio, the younger the better. Start throwing some money here and there into a trading account when you’re in your 20s, when you’re in your 30s put in $500 a month, in your 40s aim for $1,000 while always reinvesting the dividends that you get paid and by the time you’re 50 you probably won’t have to work another day.
Dividends or growth stocks?
A big criticism of dividend income investing is that you could stand to gain more over the long-term investing in growth stocks or indexes like SPY than you can make with this aggressive dividend investing strategy. While that seems to be true if we look at the bull markets of the past couple of decades, the advantage of dividend investing is that you can spend your wealth and have it too. Basically, if you invest in indexes like SPY for 20 years and you get to a point that you’re going to want to live off it, you’re going to have to sell your assets. With dividend investing, you can just spend your dividends without ever touching the portfolio that you’ve accumulated.
Companies can cut their dividends. Be aware of this.
Companies can go out of business. Be aware of this.
Super high yields are often a sign that a company isn’t doing well, as this usually means their stock price has fallen precipitously. If this happens with an individual company, watch out. If it happens across an entire sector, there could be some good value plays in there.
Travel is an economy that’s transacted in time. It’s a buy and sell between the time that you can spend enjoying life and the time that you have to sell to make the money necessary to do so. Passive income, such as that from dividends, is an optimal way to eventually cut out the sell part of the transaction so that you have all the time that you want to sit on the beach flinging monkeys at the coconuts.