How to start investing in dividends stocks? Generate a growing passive income
A step-by-step dividend investment roadmap to generate a growing passive income for retirement.
Summary: This article aims to guide you to initiate a successful habit in dividend stocks investing to generate a growing passive income portfolio for the long run. Building a consistent, growing passive income stream investing in dividend stocks requires dedication and patience. Not complex though, if you have the right investment method, it is all about developing an investment habit to generate your cashflow.
Anybody can achieve long-term success and a decent growing passive income stream investing in dividend stocks, but taking that initial step is crucial to overcome the inertia and start building your future passive income stream.
It is never easy to start a new habit, it is not easy to start on a diet, nor to start a new exercise routine, but if you start little by little and follow the right method, you can achieve any goal you set.
"Goals are for people who care about winning once. Systems are for people who care about winning repeatedly."
At House of Dividends, we believe in making quality dividend investment simple and available to everyone. We have, therefore, listed the key steps that will help you create an investment habit.
1. Define a quantitative passive income objective
We all want to earn more money, but to be successful in our dividend investment strategy we need to be pragmatic and have a clear objective.
Example:
Let’s suppose you need $100,000 a year to live and pay your bills. At some point, you need to assume you will retire and any salary or active income you receive today should be replaced by a passive income stream.
Part of this cashflow need, will hopefully be covered by your pension check, but we know pensions are struggling and may not be able to cover 100% of your cashflow need. Therefore, it is strongly recommended you start planning how to cover your future cash need by generating a perpetual, growing passive income.
Putting some numbers to our previous example… Assuming you start investing at the age of 40 and can commit to invest $1,000 every month and reinvest your dividends, you could make by the age of 70, a passive income of $108,000 /year.
This is pure dividends passive income, not considering capital gains that your portfolio may have over the years, and unless you need more money in the future you won’t have the need to sell stocks to pay your bills. Dividends, if not cut, would continue to keep growing year after year.
Note that this example was calculated using fair conservative assumptions: 4% avg dividend yield, 5% annual dividend growth, no initial investment and a 15% of tax on dividends.
To provide some guidance on this planning, we have developed a FREE dividend calculator, where you can check whether your expectations to live off dividends are actually doable and estimate how much money you will need to invest to generate a passive income that will cover your needs. Check the income Dividends Calculator and write your numbers down.
2. Have an investment method to generate a consistent growing passive income
It is important that you identify a method aligned with your goal. No matter the method you choose, but it has to be proven, and you have to stick to it.
It is also very important to understand the implicates of the method you choose beforehand. The investment method you select has to be compatible with your lifestyle and skills. Most of our readers that are looking to build passive income cashflows, may have a non-finance full time job and a family to take care. Therefore, an effortless dividend investment method that could be followed, dedicating 10 min a month is usually a great fit.
Our method to generate a growing passive income investing in dividend stocks:
At House of Dividends, we believe investment in quality dividend stocks has the potential to generate a consistent, growing cashflow for your retirement and designed a method to optimize quality stocks selection, picking only the best stocks in the market, those that have consistently increased their dividend payments for years (i.e.: PEP, NEE, O).
You can find a sample of some of the best companies for free listed in our website with updated ratios. See full 2024 S&P Dividend Aristocrats list here: Dividend Aristocrats | Updated list ratios
Our method will support you to build a well diversified portfolio of quality stocks and a consistent, growing passive income cashflow that will support or enhanced your retirement in the future. Additionally, we developed a set of investment tools which simplify the process and enable you to make investment decisions and reinvest dividends every month in less than 10 min.
You can sign up to our newsletter, to learn more about “The boring method” as we call it at House of Dividends.
3. Commit with regular funding to grow your passive income
As stated above, you will be on your way to your investment goals, once dividend investment becomes a habit. Therefore, it is very important that you can repeat the process every month, or week if preferred. This will be possible if you are able to separate some money to invest on a regular basis.
Commitment to keep a regular and relatively constant cashflow into your investment account, means you will do your best effort to save this money every single month by avoiding unexpected expenses.
4. Build an emergency fund before investing
As you know, every investment has risks, and we are focused on long term investment. Therefore, it is important that you have an emergency fund in a liquid asset (preferable cash) to count on any emergency or unexpected expense.
The amount of money to save for an emergency fund may vary, but it is usually recommended to have between 3 and 6 months of regular expenses.
5. Open a brokerage account for dividend investing
Having covered the essential steps to begin your dividend investment journey and tips for fostering an investment habit.
Now it is action time. In order to buy stocks, you need a brokerage account. A brokerage account is similar to your savings accounts, but it is designed to buy, sell and hold stocks or other financial products.
There are lots of brokers out there and several online fintechs. If you are reading our dividend investment blog, you may already know that we are boring and conservative. Therefore, we recommend you stick with a brick and mortar broker. The bigger and older, the better. It is true that purchased stocks will be held at the broker, but stocks are yours,
Pick a broker that doesn’t charge you US stocks buy/sell commissions, since that extra cost will have a negative impact on your dividend investment in the long run.
Considering currency exchange rates. Ensure your broker provides competitive market rates, especially if funding your account with a currency other than Dollars (e.g., EUR/USD conversion rate).
6. Start investing in dividends and never stop
Start investing progressively and never stop. After a while, you will feel more comfortable every day, and you will speed up your investment process. Once this becomes a habit, you may get yourself ready to enjoy your growing passive income.
Investing for the long terms means investing during bull and bear markets. You need to be able to follow your method and keep investing no matter what the context is. Markers go up and down cyclically, but you should keep your view on the long term and remember never invest money you may need in the short term, that is why an emergency fund is encouraged as explained earlier in this article.
I wish you success with your new investment habit!
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as investment advice. Always conduct thorough research and consult with a financial advisor before making any investment decisions.
