The idea of living from passive income seems very attractive. In fact, who doesn’t want to have a regular cash inflow into personal account without making any effort? This scheme is quite realistic, but it will take years before you can live on the money from your investment. Let’s find out what you can do right now so that after a while, stock dividends cover all your financial needs.
How much money do you need to invest in stocks to live on dividends?
The first step of your passive income plan is to decide how much money you need to receive each month. Everyone has different needs, but let’s say we need $2 000 per month, or $24 000 per year. It is logical to rely in long-term planning on dollars and euros and then just recalculate at the current exchange rate of your preferred currency.
The average annual return on the shares in which we will invest is about 5% per year. So, in order have $24,000 annually with return on investments at 5%, you will have to invest $480 000. Now, you know how much money you need to live on dividends, your goal for the coming years will be to reach the appropriate level of investment portfolio.
If you are “just a person who has money” and want it to work, there are several ways open to you that do not require special knowledge and skills:
set aside a certain amount of your current income for a future personal investment Fund (personal Finance management specialists believe that this should be at least 10%);
invest in ETFs, stocks and bonds through brokers.
The received dividends should be reinvested and in no case spent on current expenses, vacation or purchase of household appliances. Only in this way will it be possible to make some capital literally “from scratch”.
What is a dividend strategy, its advantages and risks?
Owners of shares and other securities can earn income from them:
due to the stock price appreciation (bought shares for $100, sold for $150, made a profit);
form cash flow due to dividends.
With any approach, real money is regularly credited to the account. However, although modern technologies allow you to quickly track spreads and make trades on the exchange with virtually guaranteed profit, all this requires time, attention and knowledge. Therefore, it is impossible to profit independently on the difference in quotes without training.
The dividend strategy is suitable for those who are not savvy in trading and just want to place money at a profit. Its advantages:
revenue can be predicted with high accuracy, since companies announce the amount of payments per share in advance;
the investor does not need to track market quotes and constantly “keep his finger on the pulse” of the stock market.
This is a great way to make money without delving into the intricacies of the stock market. But, like any strategy, a dividend strategy has a number of risks:
The company may incur losses and reduce the amount of dividend payments, or even not pay them at all.
The company may go bankrupt.
Quotes may sink.
Based on this, the time frame for investing in shares should be at least several years. During this time, market fluctuations are smoothed out.
It is important to immediately understand that the main task of an investor is to properly redistribute cash flows in the future for 20-30 years. Thus, you will not be able to fully learn how to live on dividends from shares right from tomorrow.
The right approach to choosing stocks
Before you “put” any stocks in your portfolio, you need to research the market and choose the most liquid ones. Usually, by this stage, you already have a clear idea of how much money you need to earn passive income in two or three decades. It is necessary to start from this amount and the desired time frame when analyzing the shares of certain companies.
How to choose companies:
evaluate profitability – the business should not have any losses for at least the last five years. Great if you have a small but stable profit growth;
assess the debt burden – loans from banks, debts to suppliers, the level of debt load in General;
find out what the company’s competitive advantage is, what is unique about its product, and what are its prospects in the market. Analysts give special preference to monopolies;
evaluate the transparency of the accrual policy and the regularity of dividend payments;
investigate the overall situation in the industry in terms of stability and near-term prospects.
Of course, the analysis requires some effort and time. It will not be possible to conduct it “on the knee” without at least basic knowledge of Economics. Therefore, if you are not sure of your conclusions, it is better to seek advice from the specialists of the investment company.
In General, 10-15 shares in the “short list” will be enough. Do not forget about the need for diversification – the division of funds in equal parts between several companies. Then you should exclude companies with minimal profitability. For example, you have 3 companies with a yield of 3%, 4 with 5%, and 3 with 8%. Your average return in this case will be 5.3%. And if we exclude three companies that bring in three percent each, we will get 6.2%.
Which stocks to buy and how much depends equally on the amount you are willing to invest at this stage, and, on the return you want to get in the end. In addition, if one Issuer from the portfolio suddenly goes bankrupt, these losses should be covered by payments from others.
Therefore, analyze, calculate, plan, and if you feel a lack of knowledge and experience for such work, entrust the matter to investment market professionals.