How Stock Dividends Can Boost Your Passive Income

In theory, working more equals a higher income.

But to truly build wealth, you'll want to work smarter, not harder. In other words, if you're looking for ways to boost your income, the key is to look for activities that will let you profit while doing the minimum amount of work possible. 

This is where passive income comes in.

What Is Passive Income?

Generally, people think of passive income as a way to make money without having to do any work. This can be true in some cases, but it's important to note that a steady stream of passive income does require some initial setup. 

Whether you decide to start a blog or a YouTube channel, create a Skillshare class, or sell digital products, you'll have to do the work first. 

However, if you have some savings, are open to investing, and don't need to see results right this moment, your best bet would be to invest in stock dividends.

What Are Stock Dividends?

According to Investopedia, a stock dividend is a payment to shareholders made in shares rather than cash. 

Stock dividends are an excellent source of passive income, as they're not taxed until sold. Moreover, when they are set up well, dividends can supply a solid cash flow, which you can either reinvest or use to live off in retirement.

To calculate your potential income from stock dividends, you can use the handy (and detailed) calculator tool from MarketBeat. 

Note that dividends can bring in anywhere between a 2% and 5% annual return. If you find that you could be looking at an ROI that suits your needs, the following are the best strategies for using stock dividends to boost your passive income.

Compounding

If you're in your 20s or 30s and have got time to work on building up a solid passive income (before you actually need to access it), the best thing you can do is employ the compounding strategy.

Basically, if you're working with a generous timeline — 10, 20 years, or more — you can simply reinvest your dividends to buy more shares. This will result in you earning even more shares, so you'll have the means to buy more stocks.

The great thing about the compounding strategy is that it allows you to outpace inflation. (Yes, despite what you may think, saving money can mean that you lose its value). 

So, at the end of the day, by employing the compounding strategy when investing in stock dividends, you're not just getting your money back. But, you're actually making a profit, which is the basis of building a reliable passive income.

Another benefit of reinvestment is that you can begin with a low starting capital. That's right, investing even as little as $1,000 per year will be enough to start building a passive income for your retirement.

Investing in High-Dividend-Yield Stocks

Compounding is the best strategy you can follow to create passive income for yourself. However, if you haven't got the time to wait for decades until your income meets your requirements, you'll be better off focusing on your current portfolio yield.

Essentially, by targeting high-yield options (and putting up with a decent amount of risk), you can create the same income as investing in typical stocks but with less money.

Of course, the best way to employ this strategy is not to put all your eggs in a single basket. Instead, try to set aside a portion of your capital for high-yield stock and invest the rest in traditional dividend shares.

ETFs & REITs

Does the idea of boosting your passive income with stock dividends appeal to you, but you don't have the time to rely on compounding or the patience to manually choose individual stocks to invest in? (After all, diversifying your portfolio can be challenging for beginner investors. Moreover, it can be a time-consuming task.)

Fortunately, there are a couple of solutions that might work for you.

ETFs (exchange-traded funds) and REITs (real estate investment trusts) are excellent alternatives to traditional investing strategies. 

Yes, they can come with high fees, which will somewhat limit your returns. Moreover, your dividend payouts can be variable, which is not what you want (especially if you're trying to generate a passive income for your retirement years).

Nonetheless, considering that with ETFs and REITs, you won't have as much work with your portfolio, nor will you have to make high-risk decisions, these can be a solid option for boosting your passive income.

If you decide to go this route, however, make sure that you focus on income safety, as that is what you'll appreciate the most — especially if you want to live entirely off of passive income.

How Much Do You Need to Build Passive Income with Dividends?

If you're considering enhancing your monthly income with stock dividends — without working a second job — the best thing you can do is settle on a minimum amount you can invest every month.

Generally, around $500 per month is a good start, especially if you can keep it up for 20 years, which adds up to approximately $400,000. 

With this approach, you can expect to receive around $1,000 per month in payouts, which is not that bad. 

However, if you want to make your monthly passive income more generous (and give yourself more financial security), try to raise your investments over time. Or keep your monthly payments the same, but try to keep it up for 30+ years. 

Final Thoughts

Whether you're looking to set up a quick passive income or planning for your retirement, you should definitely consider investing in stock dividends.

Yes, the last couple of years have seen a lot of volatility in the stock market. And, yes, inflation rates are sky-high right now. 

However, in the long run, this doesn't necessarily have to affect your potential profits. In fact, investing instead of saving is a much better strategy for creating passive income, and with just a few well-thought-out strategic choices, you can ensure that you have a healthy passive income that will come in handy in the future (be it near or far).

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