The world is full of abundance and opportunity, but far too many people come to the fountain of life with a sieve instead of a tank car... a teaspoon instead of a steam shovel. They expect little and as a result they get little - Ben Sweetland

This blog has now moved to Effortless Abundance. Please update your bookmark and rss subscription.

Tuesday, February 12, 2008

Dividend Stocks - the best passive income stream?

There are two kinds of income: active and passive. Active income streams are what you get in exchange for effort - your day job is the best example: you put in the hours, you get paid. Passive income streams are like getting interest from a bank account - you do absolutely nothing and the money rolls in. In between are things like maintaining a Website: it (potentially) generates money for you all the time, even as you sleep, but it does need to be monitored, updated and maintained, and so there is work involved.

You might love your job and love the work of running a business, maintaining a Website or whatever, and this is desirable because for most people their active income makes up the lion's share of all their disposable cash. But what we are thinking about here is the ideal passive income stream. Its characteristics are:

(1) It is completely passive - you don't need to do anything at all to maintain it.
(2) It is a safe and stable source - it should not change unpredictably
(3) It is rising - at least at the rate of inflation, preferably alot more.

Although some people (including no less illustrious a man than Peter Lynch) don't seem to bother much about dividends, as passive income streams go, you don't get much better than owning stock in good, solid businesses with good yields and rising dividends. Acording to The Motley Fool, If you had invested $10,000 in Ibbotson's large-cap companies back in 1980, you could sell them today for about $130,000. Say what you like about Walmart, but it's been increasing dividends since 1974 and is up 100,000% since its initial IPO. Money invested in solid dividend stocks like this, or Pepsi, Phillip Morris or Johnson & Johnsons would have go you similar results, all on the back of dividends.

Just buying the highest yielding stocks won't do, however - there's more to it than that. You need to be sure that the dividend is secure and that it will go on rising. You don't want to be monitoring the stock and the company constantly. One of the best dividend advisor services I have come accross is MorningStar's dividend Investor newsletter. For a very reasonable price you get a comprehensive monthly newsletter and a stack of e-mail updates.

We tend to get caught up by the excitement and the 'game' of buying and selling our stock in the daily circus of the market. But Warren Buffet said something like 'I never made any money in the stock market,' meaning (I guess) that it's owning the right companies at the right price (and perhaps the right dividend) that is what actually makes the money. If you do this, you can sit back and watch the money roll in, and watch the lemmings fall off the cliff along with all their hard (actively) earned cash.


Powered by WebRing.