Dividend investing can be one of the best ways to create passive income and grow your wealth over the long-term. In this post we'll break down a few ways to build your own dividend growth portfolio — Dividend Stocks, Index Funds, Real Estate, and High Yield Savings Accounts.
Dividend investing is a wealth-building strategy that’s all about creating a portfolio of assets that generate steady, consistent cash flows. It opens up 2 distinct opportunities for profit — 1) a reliable stream of income from regular dividend payments, and 2) Longer-term capital appreciation as the value of the underlying asset increases over time.
You’ve heard the quotes and references around ‘you need to be making money while you sleep...’ — this is what that’s all about…
Dividend generating investments are a great way to create passive income, build long-term wealth (by reinvesting dividend payments), and diversifying into assets that are both stable AND productive.
In this post, we'll break down the top 4 ways to invest for dividends while you're on-the-go.
1. Dividend Stocks
The number one way people invest for dividends is through dividend paying stocks, which is when a company pays shareholders a portion of earnings.
When a company earns a profit they decide how to allocate that capital in various ways — reinvest in growth, pay down debt, buy back stock, distribute out to shareholders of the company, etc.
For companies, such a move helps keep existing shareholders happy as well as attract new investors. For investors, it's a simple way to to earn passive yield (with underlying appreciation to boot!)
Typically, companies that are consistently paying dividends are comparatively more well-established, stable, and profitable.
How are dividends structured
More often than not, dividends are paid out in the form of cash, though you may have heard of companies doing the less common approach of paying out with stock / shares as well.
Typically, dividends are paid out on a quarterly basis, so that means if a company’s board sets their quarterly dividend at $0.50 per share and you own 100 shares, then you’re going to be getting $50 for that quarter.
How to choose dividend stocks
The best dividend stocks are the companies that consistently pay dividends AND raise the amount they’re distributing over time.
Additionally, you want to research and understand the fundamentals of the underlying company and their market, their dividend yield, cash dividend payout ratio, historical yield growth, free cash flow, etc.
One important point — you need to hold dividend stocks for at least 60 days in order to get benefits of qualified dividend tax rates, otherwise taxed as ordinary income
2. Index Funds — ETFs + Mutual Funds
There are a vast universe of stocks out there, so narrowing that down can be daunting and require some fairly intensive research.
If it’s too complex to go through the process on your own of figuring out a basket of strong dividend stocks, you always have the one-stop option of various investment funds like ETFs and mutual funds.
These vehicles basically offer you a ready-made portfolio for you, and give you immediate exposure across a wide array of assets.
There are specific funds that specialize in ‘income investments’, so it’s important to hone in on those. Additionally, funds are typically composed of some mix of dividend stocks or bonds, which is important to factor in according to your risk / return profile.
So you’ll be looking for assets like Vangaurd’s legendary Wellesley Income Fund (VWINX) — a mixed fund… currently about 40% stocks / 60% bonds, but they’re rebalancing based on market conditions.
With these you’re basically getting out-of-the-box diversification as you’re getting exposure across assets and sectors.
How to choose dividend funds
You’ll want to look through the fund’s prospectus to understand its strategy and ensure it’s aligned with your vision
Some other key data points to evaluate — dividend yield, historical performance (5 yr returns), and then definitely take a look at the fund’s management fees, as these can take a chunk out of your yield/profits
3. Real Estate
Another popular way to invest in income-generating assets is through real estate. There are a few different ways to generate passive dividends with real estate — REITs, crowdfunding, and directly owning rental properties.
REITs, or "real estate investment trusts", are basically companies that own a portfolio of income-producing properties. They offer an easy way to get exposure to the full gamut of real estate— commercial, office, residential, etc.
REITs are legally structured in a way where the entities must distribute 90% of their taxable income to their shareholders, so generally have pay high dividend yields. However, beware that these might be taxed at a higher rate as ordinary income (as opposed to qualified dividends which are taxed at lower capital gains rates)
Most REITs are publicly traded, so that means there’s growth opportunity here as well (i.e. shares can appreciate). And while most REITs pay out quarterly dividends, there are some doing so on a monthly basis.
Real estate crowdfunding enables everyday investors to buy small fractional units in a variety of deal types — individual properties, REITs, P2P loans.
So you’re buying fractional shares in that asset, then getting your portion of income distributions that the underlying properties generate — whether from loan interest or rental payments.
There’s been a ton of activity in the space — with platforms such as Fundrise, Realty Mogul, Crowdstreet, and of course Remote Ventures showing strong traction.
Crowdfunding is great because it makes these deals easy and accessible — you can start with as little as $100 and be up and running within minutes. And they’ve been generating strong returns — e.g. we’ve seen typical distributions at around 8-10% — not bad
A few things to look out for... Some of these platforms are limited to only accredited investors (income $200k+ or network $1m+), so make sure you qualify. Additionally, longer lock-up periods can be an unforeseen complication for many. We’ve seen quite a bit of frustration from users not realizing they were locked into deals for 5 year, and penalized if early exit.
Owning a rental property
Maybe not quite as passive, but opportunity for much higher capital returns and cash flows.
With owning a property, you're going through the entire process first-hand — researching your market, scouting and finding a property, appraising, the legalities, financing, improvements and/or construction, figuring out a property manager, tenants, and so on…
Not a trivial undertaking, but once you’re up and operational — if you’ve done it properly, you’re capturing a substantially larger share of the value created.
Interest Bearing Accounts
For those that are looking to play it especially safe, there are a variety of interesting bearing accounts — things like CDs (certificates of deposit), savings, or money market accounts.
At the moment, you’ll be hard up to find anything yielding more than 2%. While that's certainly not much, these are essentially THE most safe, stable, and liquid investments in existence.
That’s the tradeoff — lower yield in exchange for safety.
Nevertheless, if you had $120k parked in a money market account yielding 2% annually, that means you’ll be getting $200 deposited in your account every month
One potential opportunity in this area is to look at accounts internationally, which can offer much higher rates. For instance, places like Columbia are giving 6% interest on a reasonably safe account at the moment.
So, if you're living in different countries, you have access to these different opportunities.
Building a Passive Portfolio
You can see that there is no shortage of ways that you can make dividend investments and generate cashflow on your money. This is how you create passive income and growth your wealth for the long-term.
As you're building strategies to establish more dividend income streams, check out our free real estate investment course: https://realestate.remoteventures.com
Remote Ventures is an international real estate investment company building software to help you scout foreign markets, find up-and-coming neighborhoods, identify and analyze properties, close deals, and turn them into cash-flowing investments.
Sign up for our free 12-week real estate course here — realestate.remoteventures.com
Stay in the loop with the latest updates and investment opportunities by subscribing to our private mailing list.