In my last article, I suggested you make and keep one new habit. Start investing in dividend paying stocks for passive income. Check out that article here The 1 Thing I Would Do – If I Were You to read why I think creating a portfolio of dividend paying stocks is a great idea. But how do you go about creating your own passive income streams machine from a group of dividend paying companies?
Here’s a step by step guide using some great articles from the personal finance and investing community to supplement my points.
1) SPEND LESS THAN YOU MAKE
There are two ways to go about this. Make more money, spend less or combination of both.
Improving your performance at your current job can also lead to a raise. Check out this article, again from our friends at Defined Sight. They discuss how to prepare and get the most out of your performance review: Preparing for you next Performance Review.
To spend less, budget and track your expenses. The best way to reduce your spending is knowing where your money goes. Check out this article over at Simple Money Man for some great tips and tools to help with your own budgeting: A Customized Budget is a Good Thing.
2) OPEN AN INVESTMENT ACCOUNT
Not long ago Bert and Lanny, the Dividend Diplomats, opened an investment account for their business. They did a great job laying out criteria and evaluating different options. You can read about that here: 5 Deciding Factors on an Investment Account for our LLC.
The Diplomats also separately reviewed Robinhood, a stock brokerage that allows customers to buy and sell U.S. listed stocks and ETFs with $0 commission: Robinhood Review.
3) SELECT STOCKS TO INVEST IN FOR PASSIVE INCOME
Academic research suggests holding 20 stocks across a variety of industries provides adequate diversification. If you are just starting out, don’t let that discourage you. We all started with one stock, but I think it is important to have a short term plan to build to at least 5. Here’s an article link with 3 great dividend stocks to get you started even if you are a beginner.
Invest in company’s you know and understand. Have you ever shopped at Walmart or run Microsoft Windows on your PC? Maybe you like and use Apple products? You can use the Dividends Diversify Model Portfolios to get some ideas. Many have links to my investment analysis. I call that analysis, the Dividend Deep Dive. The deep dives are easy to understand. And I have done the work so you don’t have to!
4) INVEST ON A REGULAR BASIS
Each month or at the very least each quarter, deposit new funds that you have created by spending less than you earn into your investment account. Use that extra cash to add to an existing dividend stock you already own or purchase a new dividend stock. By investing on a regular basis you can take advantage of the investing technique know as dollar cost averaging. You can learn about dollar cost averaging from Rob over at Mustard Seed Money: Is Dollar Cost Averaging Dead?
5) REINVEST YOUR DIVIDENDS
You can do this in two ways. Let your passive income from dividends accumulate over time and then invest them as part of investing your newly created funds from step 4. Or, you can let your dividends reinvest automatically in the stock that paid them. This technique is known as a dividend reinvestment plan (DRIP). Keith over at DivHut wrote about the benefits of DRIP’s here: DRIP Investing Benefits.
6) TRACK YOUR INCOMING PASSIVE INCOME FROM DIVIDENDS
This is the fun part. Once your dividends start to roll in, track how much you are paid each month. Watch it grow over time. See how it positively impacts your retirement calculations. And that’s the key, it takes time. See how Dividend Daze tracks the money coming in from his cash machine here: Dividend Daze Update.
PASSIVE INCOME WRAP UP
Check out the article at Gen Y Money about DIY Investing. That’s what I’m talking about here. Don’t delay. The sooner you start the sooner your income from dividends will start to roll in and grow your passive income.
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