If my previous posts on this blog did not make it clear already, then allow me to state the obvious – I am investing in various stocks and real estate investment vehicles to generate dividend income. And I have a goal too. Next year I want to generate enough dividend income to cover my utility expenses, which is a little over $2000 per year.
How To Invest Dividend Income? I plan to invest the dividend income back to stocks. When the dividend comes to my brokerage account, I hold it, and when market tumbles, or any stock that I like, falls due to an event, I buy that stock. Or, I invest the money in other real estate investment opportunities, that will earn me more cashflow.
Now, I have a full-time job. So, I do not need to spend the dividend anywhere. I can wait. So I will rather buy some productive assets like stocks, which will go up over time with the dividend income that I am generating. I calculated the regular expenses I have, like the electricity bill I pay on average, my internet cost, car insurance cost, renters insurance cost, my streaming accounts cost, Amazon prime membership cost, etc.
Which is around $2500 every year. My other predictable expenses are rent, commute expenses, grocery, etc. I am not calculating shopping or travel expenses, those are non-essential and bit unpredictable. And moreover, it will take me a while to get there. Currently, my target is to generate around $2500 by the end of 2020.
Why don’t I spend the dividend income?
I have a full-time job. I am trying to generate a few passive sources of incomes. Mainly because one day I would like to retire without worrying about money. And money means freedom. So, I can quit my job and do something I am more passionate about, once I generate enough in passive dividend income.
I hope I made my long term goal clear. Now saying that I would like to reach my goal as soon as possible. So, while I am working full time, I would rather reinvest the dividend income, and try to produce more income next year. Say I invest $2000 extra and provided I generate 4% on those invested $, I will get $80 next year.
There is always a risk of capital loss, but that is why being careful while picking a stock is important. You can read my other article on how to select dividend stock to get an idea on how I select stocks.
And if the stock market comes down due to some event, I will expect the market to recover eventually and go up as we prosper.
What Should I buy with my Dividend Income?
We get the dividend in an extremely passive way. We just invest and then do nothing. Basically this is way too simple. But, here is what I think is the problem. Since this income is passive, we often make this mistake. We do not give importance to this money. We need to be equally careful while to invest this amount.
DRIP could be one option. But I do not want to buy overvalued stocks with my money. So I do not care about dividend reinvestment plans. But I am sure, this would be better than wasting your money in a casino.
I want to save my money, and it will be great if Robinhood finally brings in a checking or savings account that gives some interest. So I get paid while I wait. Once something happens and the stock price drops, my $ will buy more stocks.
Stocks are not the only option. I can REITs too. But in this low-interest-rate environment, those are really expensive right now. There are 2 reasons behind it. One is whoever wants to earn some yield on their money, they put their money in REITs or MLPs. And secondly, since the interest rates are cheap, and REITs take a ton of debt to finance their expenses, so it is better for them. And this notion makes them expensive.
Same goes for Master limited partnerships or MLPs. While they offer great yields. but they take a lot of debt too, to finance the projects. The price goes down with energy prices and goes up with energy price or yield going down. Personally, I feel, these are very concentrated and risky. Think about pipelines to carry gas or oil. I can never guess the longevity of such entities.
One more point is, the dividend income from REIT or MLP are not qualified. That means you pay tax at a higher rate than what you pay on qualified dividends. Most US stocks pay you qualified dividends.
How To Make Dividend Income From Real Estate?
One way to make dividend income from real estate is, of course, investing in REITs. And the other way I invest in real estate is via Fundrise.
This is a private REIT and not listed in the stock exchange. There is a management fee involved. And I am yet to see if the returns are superior. I cannot confirm or deny that at this moment. But I will continue investing there for a while, at least till I get convinced that the returns are not better.
There is another way that is Roofstock, You are I can simply buy rental properties, it is a marketplace. And once I save enough for a down payment which would be around $50,000 or $60,000, I will buy one. This will take time though. But I am not sure if this would be entirely passive like the other options. From the reviews I get on YouTube, seems like this site makes owning the property pretty frictionless.
So, these are a few ways I will invest my money so that I can earn more in dividend income or passive income. This would depend on your situation, what you want to do with the dividend income. My suggestion would be to re-invest it for more income if you can.
There is one more thing you can consider, that is paying off debts. While investing provides positive compounding, interest on debt shows you negative compounding. So pay off any credit card debt or any other debt that you have. You would pay down the loan faster and save on interest.
Best Stocks for Dividend Income
This is a difficult question to answer, mostly because legally I should not tell you how you should manage your money. But I can give you suggestions, which you should not follow.
Warren Buffett says we should all buy a low-cost index fund. If I buy the S&P 500 index, it yields around 1.5%. Which is lower than you can get elsewhere. But, then, this is higher than you will get in checking or savings account.
Or there are other ETFs for high dividend income. Vanguard have some, Fidelity has some. You can have a look. I do not own these anymore. Mostly because, I have my money in safe businesses, where the yields are better, but those are a very slow growth company.
I think going through ETF would be the safest way. Because if you are new to the market, when you experience a fall, you do not really know, how you are going to react.
In my opinion, weather a few storms first, invest in ETF, once you get used to rise and falls, you can always buy stocks. I have been investing in equity since 2008, and I am yet to get used to it.
The other option is to, delate the research work, let someone else pick the stocks for you and you just invest and collect dividends.