Passive income dividend investing is a great way to build wealth and fund your retirement life. Many people have achieved early retirement with this amazing investing strategy.
However, there are a lot of myths about passive income dividend investing.
As a result, I wanted to go over some of the big ones.
1. Dividends are entirely passive income
Alright, I’m guilty of this one. No source of income is entirely passive. You have to do some work and upkeep to make sure the passive income stream doesn’t dry up.
The thing about passive income is that most of the work is front loaded before the income actually comes through.
When you invest in dividend stocks, most of the work is done upfront. This includes researching the stock and running some numbers. Also, time must be spent keeping up with the business as they report quarterly and annual results.
It’s the same thing with real estate. You have to research a property, the neighborhood, get financing, and deal with negotiations. Also, there’s the issue of maintenance of the property to make sure it’s not falling apart. And don’t forget about dealing with pesky tenants!
Dividend investing isn’t just a blind faith buy and hold strategy. It does require some work, but it is not 100% passive income (although it’s pretty close)!
2. Dividends are forever
Despite what some people think, dividends are not forever. With times get tough, a company can and will cut their dividend to survive.
The most recent example of this is General Electric. Once a darling of Wall Street, this stock is now a big dog. It’s down over 40% this year.
Last month, GE decided to cut their dividend from $0.24 per share to $0.12 per share. The shares quickly sold off after that.
The point is no company is able to sustain dividends forever (even if they have a long-term track record). Always look at the numbers to see if the dividend is sustainable.
P.S. check out this post for 5 metrics all dividend investors should pay attention to.
3. Dividend income vs. real estate
Dividend stocks are better than real estate…or is real estate is better than dividend stocks?
I actually had a discussion with a few friends while we were out eating the other night. The discussion was about dividends and real estate.
One friend argued why would you ever invest in real estate if you could invest in a REIT? It requires less work and you get a pretty decent yield (for example, Realty Income yields 4.5%).
Personally, I think every investor should own both dividend stocks and real estate. Both provide a stable and predictable source of passive income. Also, it is important to diversify your income streams.
One reason why I love dividend stocks over real estate is because they are much more liquid. Don’t like the stock anymore? Need cash to buy a home or a car? Well, you can sell your stock anytime and get cash almost instantly.
Real estate is much less liquid than dividend stocks. However, there is still a great place for real estate in your portfolio.
First, real estate provides you with financial leverage. That’s a good thing as long as it is in moderation.
Second, there are tax benefits and deductions that are unique to real estate investing.
Third, real estate provides much needed diversification from stocks.
And finally, there are synergies and economies of scale if you own multiple rental properties that can’t be achieved with dividend investing.
4. Dividend investing is hard
People think investing in dividend investing is hard. In fact it’s not. I can summarize the dividend growth investing (DGI) strategy in one sentence:
Buy companies that can pay and increase dividend payments over multiple decades.
Dividend investing is the one of the simplest stock market strategies. What is difficult is actually executing this strategy!
Let’s be honest, dividend investing isn’t very “sexy.” The biggest asset of dividend investing is time and compound interest. The longer you wait the more money you’ll make.
Many people start straying from the DGI investing philosophy when they get bored. That can have disastrous results on your returns. Don’t fall for that mistake.
5. You can retire off dividends
This myth is true. It is entirely possible to retire and live off dividend payments. Check out this post I wrote to calculate how big your portfolio needs to be in order to live off passive income dividend payments.
Living off dividend payments in retirement is the ultimate goal of any DGI investor. It is possible, but it requires patience to build your portfolio to that level.
Here are a few things to keep in mind:
*Stick with the strategy: DGI has been proven to beat the market over many decides. Sure, there are certain periods in a few years where it may underperform, but it always overperforms in the long run.
*Always monitor your portfolio: Dividend investing requires you to periodically monitor your portfolio and to rebalance it occasionally.
*Accurately forecast your living expenses: Retiring early on your dividend portfolio requires an accurate forecast of what your living expenses will be. Be honest with when budgeting this out!
6. Dividend income is slow
Many people think investing is “slow”. They think it takes a long time to really build wealth.
Personally, I think people just check their brokerage accounts too often so it often seems “slower” that it really is. Regardless, people are always asking me how they can increase their dividend income faster.
There are three basic ways to increase your dividend income:
First, you can save more money to invest in dividend stocks (obviously).
Second, you can invest in higher yield dividend stocks, which may or may not be a good thing.
Finally, you can enhance your dividend income by writing covered calls.
This is one that I’m actually excited to write about. I just released a course about Covered Call Writing. This is a great strategy to use if you think a stock in your portfolio isn’t going to go anywhere.
What you do is write a call option against the stock. You will earn the premium from selling the option. If the stock goes nowhere as you think, you’ll make additional passive income without doing anything. Plus, the strategy also reduces risk on the downside in case the stock declines.
I have been able to increase the return on my portfolio by 3%+ every year by writing covered calls. On a $500,000 portfolio that would be an additional $15,000 a year in income just from clicking a few buttons!
Readers, do you think I missed any other myths of passive income dividend investing? Let me know in the comments!