I’m about to condense some of the most valuable knowledge that I’ve been taught over the last few years into a couple of sentences. Ready?
If you want to be truly free in this world, you need to master your money.
You need to transition from an employee who works for active income to an investor who sits back and earns passive income.
We all start having to work for money but, the more you save, the closer you can get to the goal of financial independence, where all your expenses are covered by your passive income streams.
That doesn’t sound too bad, does it?! 😉
The Single Best Source of Passive Income
There are many ways to make passive income. A couple of weeks ago I shared 11 passive income ideas to help you start earning money without having to work for it directly.
You may have noticed that I am pretty biased towards what I consider to be the best source of passive income there is: Dividend Growth Investing.
This is how it works:
When a company grows enough and starts trading publicly (when it has shares in the stock market) it can choose to start paying dividends to its shareholders. Not all companies do this, as it is often better for them to reinvest all their profits back into the business to keep growing.
However, companies get to the point where they start to experience diminishing returns from their internal investment, so they start paying their shareholders to keep them happy. If you run a global business that sells deodorant to the entire planet, it can be challenging to reach an even larger market!
Becoming a Shareholder is Awesome
Let’s say you’ve decided to listen to reason and start saving some money every month and investing it into carefully picked stocks.
You’ve opened an account with a broker and transferred this month’s savings into it. You then research a few companies that are attractively valued at the moment and go for Coca-Cola.
If you’ve never heard of this company, they make fizzy drinks that a few people drink here and there. 😉
What you may not know is that for the last 54 years, The Coca-Cola Company has not only been paying dividends consistently – it has been increasing them.
Every. Single. Year.
In that time, the share price has done something like this:
This is the best part; even through the lowest drops – including wars and recessions – it has increased its dividend payout to the tune of 8%.
Can you imagine your employer giving you an 8% pay rise every year? Your salary would double every 9 years (according to the handy rule of 72).
Coca-Cola is only one example of a Dividend Champion – a company that has been raising dividends non-stop for more than 25 years. There are literally hundreds of companies with a solid dividend history, which you can see in David Fish’s amazing spreadsheet.
You see, when you’re a shareholder, you enjoy the rise in stock prices and the consistent dividends. It’s pretty sweet.
If you look at historical data, it’s easy to see just how sweet it is. The graph below was created using Robert Shiller’s data and plotted by Reddit user u/zonination – here’s the full write-up. This is historical data from the S&P 500 going back 145 years.
If you invested 1 dollar in various stocks and reinvested all dividends that you received, you’d double your money every 10 years. This also takes into account yearly inflation, so you can’t use the excuse that “money now isn’t worth as much as it was“. 😉
You may be wondering why the average person doesn’t invest in dividend-paying stocks and keep reinvesting their dividends for decades. The answer is simple: fear.
I’ve written before about fear and investing, and how there’s only one intelligent thing to do when the stock market tumbles. However, most people panic when they see their stock drop in value over a short period of time.
While I wasn’t in the market during the last recession, I’ve seen some minor but heavy drops in the market. It’s not a nice feeling to see your portfolio drop 12% in one day, but dividends make it much easier.
Businesses repay your trust in them with dividends. It’s great to see that, no matter how low the value of your stocks drops, you’ll still be paid the same amount of dividends – and probably more.
It’s not just speculation – it’s real, tangible money. It’s entirely possible to retire and live off dividends for the rest of your life without even touching the principle – i.e. never selling a stock.
Dividend growth investing isn’t sexy. “Slow and consistent wealth” isn’t as appealing as “get rich TOMORROW!!!”.
This could be the reason why you don’t hear many famous people announcing their dividend strategy. However, there are two people who are prolific dividend investors:
Warren Buffet’s Berkshire Hathaway owns famous dividend growth stocks such as Coca-Cola, IBM and Procter & Gamble – and by that, I mean that he owns really big chunks of each of these companies.
Bill Gates, who played a big part in me being able to work from home using a computer (thanks, Bill!) also owns several long-running dividend-paying companies such as Wal-Mart and Caterpillar.
Another not-so-famous dividend investor went by the name of Ronald Read. He worked as a janitor and only made a modest income, but he managed to save a lot of it through frugality.
Through investments in quality, blue-chip companies such as AT&T, Bank of America, CVS, Deere, GM and General Motors, his portfolio rose to a staggering $8 million.
If he could do it, what’s your excuse? 😉
How to Live off Dividends – Step by Step
So, are you ready to start building the portfolio that will allow you to retire early – or at least never have to work for money again?
These are the steps you need to take:
- Open a brokerage account.
- Link your new brokerage account to an existing bank account and withdraw some money.
- Learn how to do some basic analysis on dividend stocks – this is a great starting guide.
- Buy stocks when their valuations meet your criteria.
- Reinvest any dividends that you receive into buying more stocks.
- Repeat until the amount you earn in dividends can cover your expenses.
- Enjoy being the master of your time!
If you want to see how far your money could go if you invested in dividend stocks, I’ve created a handy calculator for you!
OK, I actually made it for myself so that I could calculate when I’ll become financially independent, but I’m more than happy to share it.
You can download it for free below:
Living off dividends without having to ever work again is a real possibility for anyone. As long as you can earn money, save a decent part of it and keep reinvesting the dividends that you earn passively, you’ll become financially independent.