5 Reasons Dividend Income is the Easiest Passive Income Source

 

easiest passive income

Everyone is interested in creating a form of passive income.  However, I am here to talk to you about the easiest passive income source that you can start, today or now, if YOU wanted.  Further, it does not have to be time nor capital intensive as others make it out to be.  As our Dividend Diplomats name suggests, dividend income is the easiest passive income source and here are 5 reasons why!

5 reasons dividend income is the easiest passive income source

There is no lie about why I love dividend investing.  Dividend investing was the easiest passive income source that I was able to start.  Funny thing, I started this at age 20.  I started back then (yes, I am getting old here) with a $50 commitment, per month.  Today, dividend investing is easier and takes, surprisingly, FAR LESS capital than $50!  In addition, you can do it all from the palm of your hand, with your phone.  Further, even MORE information is available to beginner investors, to help teach you how to invest and where to start, including our blog ; )

The goal is financial freedom.  If you are on this blog, you may be on here either learning about financial freedom or are looking for other income sources to create to reach this promised land.  You also may be here because you are a dividend investor or other investor and you are interested in creating more dividend income or even adding dividend income as an investment to create a cash flow source.  There is also the chance you accidentally clicked on this article and are now thinking – who the heck are the Dividend Diplomats?!  We are here to help YOU on your journey with investing, financial freedom or even financial education!

Still haven’t given enough about dividend income?  Time to bring out the Top 5 Reasons that we think dividend income is the easiest and, arguably, the best passive income source!  Let the list begin!

#1 – Low Cost to Entry

Due to stock brokerage firms and investment companies reducing or slashing their trading fees to $0.00, this has allowed the lowest cost to create an additional source of passive income.

investing, brokerages

Opening a brokerage is SO EASY now.  I personally use Ally Investing and I know Bert uses Fidelity’s brokerage services.  Both stock brokerages are extremely easy and it’s all about finding what works with you.  Here are a few other brokerages that come to mind:

  • Charles Schwab
  • Vanguard
  • T. Rowe Price
  • TD Ameritrade
  • E-Trade

There are also mobile/tech-savvy brokerage accounts like Robinhood, Acorns, M1 Finance and many others.  Robinhood, which we will discuss later, allows you to even become a beginner investor with as little as $1.00.  Becoming a dividend investor has never been so simple.

Then it comes to actually buying stock.  For example, if you had $30.00, you can sign up for a brokerage account (at any of the names listed above) and link your banking account to it.  You can make a transfer in for $30.00 and that would be enough to buy 1 share of AT&T (T), one of our Top 5 Foundation Dividend Stock!

buy stock

Once funds are available for use, you can click Trade and add a market or limit order (limit order = you place the price you’d like to make a purchase, if the stock price hits) to acquire 1 share of AT&T!  Buying 1 share of AT&T would provide $2.10 in forward dividend income.  Boom, passive income stream has begun!

#2 – Fractional Shares

As technology has advanced, investing applications have gotten far better than how they were years ago.  For example, Robinhood has now introduced fractional share investing.  Therefore, with even as little as $1.00, you can invest and buy a fractional share.  You can invest $5.00 and put $1.00 in each of our Top 5 Foundation Dividend Stocks even.  Here is a screen shot below, from their site, showing an $80 investment and acquiring fractional shares with those funds.

robinhood, fractional shares

Related: Top 5 Foundation Dividend Stocks for any Portfolio

In addition, other brokerages may allow fractional share investing, outside of Robinhood.  The beauty of it is, is the low cost and the instant diversification you could have.  Imagine using $10.00 and investing $1.00 into 10 of your favorite dividend producing companies, such as Johnson & Johnson (JNJ), Pepsi Co (PEP), McDonald’s (MCD), Apple (AAPL) or JPMorgan (JPM).  Due to no-cost and fractional share investing, you start your dividend investing journey with your phone, $1.00 and the passion to create other income sources!

In addition, fractional shares are usually available through dividend reinvestment.  The dividend reinvestment topic will be the next topic below, but this is another form of investing into fractional shares.

Through my brokerage at Ally Invest, my dividends have reinvestment turned on and when my dividend income is received, such as from Realty Income (O), they are reinvested right back into more shares of the company that paid.  The reinvestment occurs for me for fractional shares, which means I don’t have to wait until my dividend received is at least the share price amount.  Here is an example below:

In the above photo, you can see that Realty Income (O) paid me a dividend on July 15th in the amount of $30.55.  This dividend income payment reinvested back into the same company, acquiring another 0.52356 shares, aka a fraction of a share!  What a great segway to… #3!

#3 – Dividend Reinvestment

As you know how we love the power of dividend reinvestment, this is another reason why dividend income is a great source of passive income.  When the dividend reinvestment feature is turned on within your brokerage, you have the opportunity to reinvest your dividends to continue to grow that income stream, by acquiring more shares.  Again, due to technology, this can be done automatically.

Related: The Power of Dividend Reinvesting

When dividends are reinvested, and acquires MORE shares, guess what happens?  More shares equals… MORE income.  In the example above from Realty Income (O), 0.52356 additional shares would add $1.47 in forward/additional income (as Realty Income produces $2.802 in dividends per share, per year, at the time of this article).

Now picture if you consistently invest and you have dividend income coming from dozens of companies or even more shares?  Yes, your income grows significantly from dividend reinvestment alone.  This is one sign of how your passive income stream can go, automatically.

dividend re

Oh, I forgot to mention, dividend reinvestment is no fees for me and I am sure/believe it is on most brokerages.  If it’s not free, I would contemplate switching, to put more of YOUR dollars to work versus being taken away in fees!  Every Dollar Counts baby!

Related: Every Dollar Counts

#4 – Dividend Growth

Do you want a passive income stream that grows, by itself?  How about an income stream that can grow faster and more than inflation?  Would you like an income that grows more than what a normal raise is at a typical 9-5 job?  Look no further than dividend income.

Dividend growth on my dividend income has varied over the years, from mid-single digits, to easily double digits in other years.  I know we are put to the test during COVID-19, but dividend growth will come back.  Here is the graph that I know proves the point, obviously there is capital infusion in this chart, but dividend growth has played a significant part!

Now, most companies you will see a combination of dividend yield and dividend growth.  The higher the dividend yield, typically the dividend growth will be lower.  I usually aim for the 8%-10% total range of dividend yield + dividend growth.  A great example is Johnson & Johnson (JNJ).  They yield approximately 2.85% and their 5 year dividend yield average is approximately 6.3%.  That is a total factor of 9.15%.  The dividend growth rate of 6.3% far exceeds inflation and what most individuals receive as a pay raise at work.

A great example is 2019, dividend increases added $416.00 to my forward income.  The results from that year are linked in the related article below, but I wanted you to know that the there is more proof in the pudding.  The 2019 was a lower dividend growth year, for me, as well.  I anticipate 2021 and forward to be much higher.

Related: The Impact of Dividend Increases through December of 2019

That represents almost an additional $40 per month, on a go forward basis, without doing anything!  Definitely a significant benefit of being a dividend investor.  However, you may be asking – how are you taxed on this dividend income / passive income source?  Touche and time to jump into reason #5 of why dividend income is the easiest and (cough) best!

#5 – Dividend Taxation

Who would have thought taxation could be your best friend? Not many.  However, dividends receive preferential tax treatment.  First, it’s good to start with the corporation that you invested in.  Since they make money, they pay tax on their earnings, PRIOR to sending you, the beloved shareholder, your dividend payment.

Therefore, Uncle Sam, aka “The Tax Man”, decided to change the tax law to recognize this.  Doing so, you are essentially capped at paying taxes at 15% and the best part – you can also have a chance of paying a 0% tax!  Where else can you earn passive income and not pay taxes?  There aren’t many other investments where it is this easy.

In addition, your income can be 20%+ more if you receive dividend income vs. wage income.  Taxation alone allows you to keep more of your passive income than other forms of income!  Though this sits at #5 on the list, it may be #1 in my heart.

We go over the differences of $50,000 in wages earned vs. $50,000 in dividend income earned.  The results are fairly eye opening and really showcase the massive differences due to taxes!

Related: The Power of $50,000 in Dividend Income, Explained

Ultimately the amount you are taxed on, depends on the tax bracket you are in.  From the below chart, you can make up to $40,000 as an individual in that bracket and pay 0%, given that’s the capital gains rate in that threshold. Further, it’s fun to point out, your income can be in the $441,450 bracket and you are only paying 15%, definitely beats 35%, no doubt.

dividend tax rate

(photo credit: SmartAsset)

conclusion

I want everyone to be able to better themselves financially.  Creating a second income source does not have to be a daunting feat or some “expense” idea to start.  You can literally start this passive income journey with a low amount of money and with all of the educational tools available online, on YouTube (subscribe, wink, wink!), books at the library or with advisors/close friends/family that understanding investing, you can start this TODAY!

That’s the goal.  We want to reach as many out there as possible.  We want to empower you, the reader, to see that this doesn’t have to be a stressful means to better your financial path.  Dividend income allows you to have a tax efficient, low cost and automatic way to create a source of passive income.

I hope this article causes you to think more, to help not be dependent on a single income.  Creating dividend income can be the easiest method to add a second cash flow source for you and your family!  Also, here is a hint.  Once you start… you want to keep going and build this dividend portfolio as large as you can and as fast as you can.

Thank you everyone, leave your questions, comments below and we hope you have feedback for us!  Appreciate you for stopping by and, as always, good luck & happy investing!

-Lanny

14 thoughts on “5 Reasons Dividend Income is the Easiest Passive Income Source

  1. Lanny, This is an excellent article for people starting out on our journey. I just shared it with some kids of friends who are getting married soon. Hopefully they take it on and join us.

  2. Lanny,
    Great post. It’s a hell of a time to be an investor for sure and I can’t think of a better way to take advantage of free commissions and fractional shares than the DGI strategy!

  3. Lanny, Great article. i just shared this article with some of my friends who wants to know more about dividend investing.

    Billbrows Dividend Fund

  4. As we’ve been working through our early retirement transition, dividends have been a pretty big part of the plan.

    One underappreciated strategy tied into their passive income use is to focus your dividend payers in a Roth (IRA, 401k, etc) where possible. Those sweet, sweet payments won’t get taxed and you’ll have more to automatically DRIP!

    • Chris –

      Awesome to hear! Glad that the dividend strategy has played a huge part. Yes – the tax benefits are insane, love to DRIP and dividends are heavy in the retirement based accounts, NO DOUBT!

      Nice work!

      -Lanny

  5. Lanny
    Great article the one thing that really stands out is 416.00 in forward income just from div raises without lifting a finger. Looking forward to more posts like that it really keeps me focused on financial freedom.

    Best of luck to you guys

    Wayne. Long Island N.Y.

  6. Awesome article and love the site as a whole, lots of great info!.

    If I have an existing portfolio of index funds across various accounts how would you recommend I start implementing more of a dividend growth focus? Would you ultimately move an entire portfolio to dividend focus (if tax was no issue, or starting with cash)?

    Also I see your screening metrics for finding new stocks, but do you have upper limits on total numbers of stocks, company sector, and country( USA vs Intl) for your existing holdings?

    How do you determine when to reduce or eliminate a holding that might not be performing?

    Appreciate the time you put into this site and willingness to provide a transparent view of your journey!

    • Robert –

      Great questions! Obviously I will offer my take, but def. consult your advisor or research more as well ; )

      If you have many/multiple index funds – depending on age/age didn’t matter – I would transition the bulk to a split index between two – VYM and VOO, maybe 30-35% each.

      Then, I would take the remaining 30-40% and then allocate amongst 5-10 strong undervalued holdings, such as JNJ, AFL, GD, CSCO – etc.. things of that nature, to reduce exposure in one to three stocks, but gain industry exposure at the same time.

      As for USA vs. INTL, I find it more consistent on the USA market, due to dividend schedule, that’s all.

      If they don’t fit your metrics or strategy, though a hard decision, you should move on.

      Keep the questions coming!!!

      -Lanny

  7. Definitely has never been a better time for investing! The barrier to entry is much lower compared to the past. With all the info you guys provide and other places on the internet as well, anyone that wants to invest can easily invest. Can you imagine and compare the hours upon hours of manual and intensive research work done in the olden days and the tribal knowledge held amongst just a few inner circles. The internet and all of the innovation of the Fin Tech space makes it much more of a fair playing field for all to succeed. There’s never been a better time for us!

    • StockRider –

      That is one day that I am thankful I didn’t have to do/ go through! I am sure there was a lot more money to be made at better prices, though ; )

      In just my 11+ years, I have seen SO much innovation, it is insane. $0 trading fees. Trading from an app. Robo-advisors. You name it – all very new within the last handful of years!

      -Lanny

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