Dividend-paying stocks can help you build passive income

We all want to get rich, as soon as possible.

Those smarter amongst us know that getting rich is not simply a matter of how hard you work. It is also about letting your money do the work for you.

Slowly, as one’s career progresses, and the ability to work takes a toll, the importance of passive income becomes undeniable. To enjoy passive income either during your retirement, sabbatical, or career break, one needs to build a portfolio of passive investments that deliver consistent and inflation-beating returns.There are several investment options that can generate passive income for an investor. 

Dividend-earning stocks are one of the most popular options out there, and it has delivered massive returns to smart investors. Let’s dive into the basics.

What is dividend investing?

Dividend investing involves investing in shares and mutual funds that deliver reliable and recurring dividend payout. It is necessary to select the right stocks with a long track record of delivering dividends consistently, and predictably. The larger one’s shareholding in the stock, the larger would be the dividend payout. The beauty of dividend investment is that even during spells of economic disturbance or market meltdowns, the investor can keep earning from his shareholding in the company.

How to kickstart your dividend stocks investment journey?

  1. Find reliable dividend-paying stocks

Assessing the track record of a company when it comes to paying dividends is extremely critical. Investing based on just one-off large dividend payments tends to be misleading. In order to determine if a company is worth investing, one must study the payout yield over the last 3-5 years. Additionally, one must also look at the net profit earned over previous years, and the growth in the top line. It also helps to compare the position of the company vis-a-vis its industry peers.

  1. Diversification is key

Investing all your funds in just one stock alone is a surefire recipe for financial disaster. After filtering down to your preferred dividend stocks, distribute your investment corpus as per your risk appetite. One must attempt to diversify their risk as much as possible. Investing in consistent market leaders across several segments like auto, pharma, FMCG, real estate, finance etc can ensure that you keep earning passive income despite fluctuations and upheavals in one or more sector.

  1. Due diligence is a must

Stock market investing requires eternal vigilance. One cannot rest on their laurels, after investing in a company. It is necessary to keep an eye on the company’s quarterly performance, monitor the ups and downs of its operations, and compare its performance with the other industry peers. 

At the same time, it is necessary to keep oneself informed about the larger macroeconomic and financial outlook. Dividend payment is incumbent on a company generating profits, and continuously improving its top-line performance. During recessions and slowdowns, a company’s revenue stagnates or goes down. Net profits also tend to take a nose-dive. In such a situation, investors must be able to discern if the downturn is transitionary or more permanent.

  1. Re-invest dividends

Needless to mention, your dividends when re-invested can help increase your shareholding and secure a larger dividend pie for you. Dividends, when re-invested, compound over time securing massive returns for the investor.

  1. Tapping dividend-yield mutual funds

If you are too busy to look for dividend-paying stocks, it is most advisable to invest in dividend-yield mutual funds. These mutual funds invest your corpus — either as a lump sum or as installments — in quality dividend-paying stocks. You can also opt for the dividend re-investment option, which will help grow your wealth at a rapid pace. 

The final word

Earning passive income from dividend-paying stocks helps build capital in the long run. Depending upon the inclination of the individual, the dividend can be re-invested in shares, or they can be diverted into other assets for risk diversification. They can, of course, also be used to support one’s expenses. 

While investing in dividend-paying stocks, one must pay extra attention towards accumulating their preferred stocks during bear phases of the markets. This way, investors can enjoy the dual benefit of accumulating shares at a low price point, and earning massive dividends when the markets are on a high.

At Appreciate, we provide the tools and resources necessary for both novice and seasoned investors. Visit our website to learn more and start your journey towards financial success.

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