The cornerstone of passive investment theory is having a firm foundation of dividend paying stocks in your portfolio. Stocks that pay dividends monthly offer two things for you and your portfolio. They offer stability, usually accompanied by a diminished level of price fluctuation, and perpetual growth in instances where reinvestment techniques are used.
The difficult part of the entire processes of dividend stock investing is setting up your stock portfolio in the first place. You need to find stocks paying dividends monthly or quarterly if you are going to have a monthly passive income stream.
Stocks That Pay Monthly
A quality passive investment plan will always consist of stocks that are well diversified across a wide group of asset classes. The passive investing strategy will almost always consist of a plan to buy the entire stock market through various pools of investments. And it will always consist of a plan to buy and hold a collection of stocks paying dividends monthly or quarterly as these types of companies are usually less volatile in the markets eyes and they reward you with financial gain and monthly income even when you are not selling stocks.
The hardest part is finding the right stocks though because they are not all made the same. In fact many stocks that pay good dividends pay abnormally high dividends as a ratio between the payment and the stock price. The ratio, called the dividend yield, is often a good indicator on whether a company pays small dividends, good dividends, or dividends which are too high.
When you find a stock that pays out at a yield of over ten percent you should really consider the reasons why. You may find that the price has been falling and as a result the yield has been climbing. This is suggestive that future dividend payments may be declining.
What To Look For In Dividend Paying Stocks
The next time you are looking for new investing ideas you should look at the yield of various stocks and index funds relative to time. For instance if you are going to make a SEP IRA contribution or start investing in HSA accounts then you will not want to buy stocks paying dividends when they are at a high price, you want to buy them when they are low. This has the effect of raising the dividend yield on the stock or index and results in you having more passive monthly income month after month.
Your retirement and health savings accounts should be investment models focused squarely on stability and slow growth and that is exactly what dividend stocks offer to the investor. Of course you can't just buy one stock and hope that it works out. You have to spread out your risks and get diversified with a basket of dividend paying stocks.
What if that one stock lowered their monthly payments? This would cause the price to drop and your monthly income to decline. By buying baskets of many stocks you can ensure a greater level of consistency in your investing returns. When one stock lowers their dividend payments another raises theirs. This is diversification.
In fact this is another thing you should look for in potential investments. Stocks that pay dividends that have increased year after year without deviation are probably some of the best investments you can make. In good times and in bad if a company has raised their dividend they this indicates that the company is grounded and entrenched in slow growth and should be a safe haven for you and your money.
Even in recession and stagnant economic times there are companies that continually raise dividends on an annual basis. These are some of the best companies to invest in as they have a history of providing value and consistent returns. To find stocks that pay increasing dividends will take a lot of research but it can be very rewarding.
Finding Stocks That Pay Good Dividends
The younger companies are usually in some sort of growth phase where all profits are reinvested back into the company. This is why they often report no dividend payments or low dividend yields. Stocks with a long time history of profits are usually past the growth phase and are paying much of their profits back to their investors via regular payments.
Once you have a solid list of potential companies do some more brainstorming for companies which are in boring sectors of the economy. This is rather subjective but quite often boring sectors like trash collection, funeral home management, or any other business line which is boring as an investment carry high dividend yields.
These are the stocks that are worth holding in a passive investing plan because they are business lines that will never end. Trash will always have to be collected and people will always need funeral homes. These types of businesses are the perfect passive investment into dividends you can get assuming the companies are solvent.
Your investment research will have to begin from here. Take your list of potential dividend paying securities and start looking them up on your favorite finance website or resource and decide whether they are good for your portfolio.
Use your regular metrics on how to evaluate dividend paying stocks. Look at the yield; look at the history. Make sure their dividend payments have been increasing regularly over the years. Also, make sure the yield isn't at unusual highs compared to historical trends indicating potential problems and then decide which companies paying dividends are right for you.
Your own personal situation may be different from your neighbors so only you can find dividend paying stocks that will compliment your passive income stream.