Do you know how to earn passive income in the stock market through dividends? There are a couple of ways you can invest for passive earnings – through stocks, mutual funds, ETF’s or even bonds or high yielding savings accounts. It’s important to understand each type of investment and which investment is the best for earning passive income - you must understand how to balance risk and choose your investments. You can generate a nice stream of money each month if you invest smart, but you need to know the difference between each type of investment before you begin and figure out your monthly income goals.
What is Passive Income? Passive Vs. Non Passive Income
Passive earnings is basically money you make every month on a regular basis that requires little to no effort from you to earn it – nor should it require your physical presence.
What many people might not know is that the IRS actually categorizes income in three categories:
- “Earned” income which is the most well-known, because it’s the money you make from working physically.
- "Passive" income which is money you make from investments such as real estate income or income you earn through a business.
- And "portfolio" income, which is money you make from dividends in the stock market (and which is also passive, really).
There are many different forms of passive income and ways to generate multiple streams of passive income. Read this story for some great passive income ideas.
For this discussion, we will focus solely on earning income passively through dividends. This can be accomplished with stocks, ETFs, mutual funds, etc.
Dividend Investing for Income – What to Know
There are thankfully many different forms of investing vehicles you can use to generate a passive earnings every month.
One of the most popular ways to invest is a high quality, low risk dividend paying ETF. Think this is a great passive income idea – an easy stream of income – for a couple of reasons.
First, I believe ETFs are better than mutual funds for a number of reasons. Mainly, if you choose an ETF that has a low expense ratio, you will save a ton of money over time in unnecessary fees.
I also think ETFs are better than stocks in some ways because ETFs are generally very diversified and take away the risk of you owning a stock of a company that goes bankrupt. You are investing in a number of high quality companies and a good ETF should be able to outperform the S&P 500.
Best ETFs for Passive Income
One example is the Global X SuperDividend ETF (SDIV). It’s a high-yielding, monthly dividend paying ETF currently pays 7.5 percent annually.
An example of how you can make passive income with this ETF - If you put down $5,000, for example, you can expect to make $54 a month in passive income.
This doesn’t sound like much but you really haven’t done anything for it – it’s totally passive. And you can consider re-investing those dividends to make EVEN MORE passive income each month. This is also a great way to dollar cost average your investment over time.
Even if you don’t choose to reinvest your dividends, that’s still money in your bank account that can be used to pay off debt or living expenses.
Another ETF example is the Blackrock Income Trust (BKT) The goal of this trust is to acheive both preservation of capital and high monthly income.
At $7.40 a unit, this is an income trust paying a monthly dividend of $.04 a month. So a $5,000 example - 680 unites of BKT will net you approx. $27 a month, or $326 a year.
You are getting income in your pocket every month plus good potential of capital appreciation. Not bad if you ask me.
Dividend Paying Stocks for Passive Income
If you want to add a little more risk (but higher return potential) you can consider adding some income stocks to your portfolio. There are a number of high quality, recession proof stocks out there that will pay dividends in any type of economy.
McDonald’s (MCD) is one example of a stock that has a long track record of passive dividends plus has appreciated in value a great deal. That appreciation is a great added bonus to receiving regular income!
McDonald’s stock currently pays a 3.4 percent annual dividend. A $5,000 investment would net you approximately $170 a year in dividends, or $14 a month.
That’s passive income in your pocket every month. And keep in mind that Mcdonald’s stock since 2009 has nearly doubled!
An another example of a stock that pays passive income through dividends is Altria Group. Altria (MO) is one of the more popular dividend paying stocks that I’ve seen – they pay a 5.3 percent annual yield currently.
Altria has also appreciated more than 100 percent since 2009. So a $5,000 investment then would be worth over $10,000 now – plus you would receive nearly $265 a year in passive income or $22.
Not to mention, I believe both MCD and MO have great potential to increase their dividend payouts in the future. Another added bonus to investing in dividend stocks for passive income.
Best Books on Dividend Passive Income
There are a number of great books out there to make you even more knowledgeable on the subjects of investing and passive incomes.
I’ve barely stratched the surface with MCD and MO. What are the best dividend stocks?
This book below is one of the best investing books you’ll find. It provides practical, proven tips to outperform the market.
#1 The Little Book of Common Sense Investing will show you how to incorporate a proven investment strategy into your portfolio and It will also change the very way you think about investing.
This book build a strong case for investing in low cost ETF funds as opposed to Mutual Funds.
Amazon Price: $22.95 $12.06 Buy Now
(price as of Mar 5, 2014)
This book covers all technical aspects of dividend investing and “goes deep inside the mechanics of building a high dividend yield, low-risk portfolio." Dividend growth through DRIPS and re-investing your passive income is important, and this book will not only teach you why but show you how!
#2 Income Investing Secrets
This is a great passive income book especially for those looking to retire. A great read on inveting for the long haul and creating lifetime passive income for your retirement!
Amazon Price: $24.95 $19.12 Buy Now
(price as of Mar 5, 2014)
Another great book and a classic on building passive income is the "Rich Dad Poor Dad" series.
Of course, one of the most popular books out there is called "The Four Hour Workweek." This book shows you exactly how Timothy Ferris went from working a 9-5 job to owning his own business and making tons of money in passive income.
"This step-by-step guide to luxury lifestyle design teaches:
•How Tim went from $40,000 per year and 80 hours per week to $40,000 per month and 4 hours per week
•How to outsource your life to overseas virtual assistants for $5 per hour and do whatever you want
•How blue-chip escape artists travel the world without quitting their jobs
•How to eliminate 50% of your work in 48 hours using the principles of a forgotten Italian economist
•How to trade a long-haul career for short work bursts and frequent “mini-retirements”
Check it out below:
Amazon Price: Buy Now
(price as of Mar 5, 2014)
Whether you are already earning passive income in dividends and other investments, or are just a beginner, I hope these tips helped you!