6 Steps to Create Your Passive Income Machine

Passive Income

Passive income

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.

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.


There are two ways to go about this.  Make more money, spend less or a combination of both.

You can make more money by scrubbing up your resume and finding a new job.  How to improve your resume:  Beef Up Your Resume.

To spend less, budget and track your expenses.  The best way to reduce your spending is by 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.


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. Of course, I prefer to trade stocks for free using Webull.


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 companies you know and understand.  Have you ever shopped at Walmart or run Microsoft Windows on your PC?  Maybe you like and use Apple technology products?  You can use the Dividends Diversify model portfolio 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!


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 (DCA). Using DCA is a great tool when you are learning how to get dividends from stocks.


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.


This is the fun part.  Once your cash 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.


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.


Are you a Pinterest user?  Then be sure to follow Dividends Diversify on Pinterest by clicking this link:  Pinterest.  Then click the red follow button on the Dividends Diversify Pinterest home page.

Using these 6 steps, I have built enough passive income to live off of. These steps are the foundation of my financial independence retire early (FIRE) plan. In addition, these steps are also a key part of your personal finance and investing strategy to create your wealth and live a rich life. #money #personalfinance #investing #passiveincome #dividendstocks

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

Now enjoy your passive income!

52 thoughts on “6 Steps to Create Your Passive Income Machine”

  1. Tom! I am completely humbled you included my favorite pieces! Careers and professional development are some of my biggest passions — and you tied them into your 6 steps of creating your passive income beautifully! Great format in your article and list of pros you have included and tipped your hat to. Love it all!

    • Good morning Mrs. DS. You are up an at it very early today. Glad you liked the post and thanks for checking it out. Have a great day! Tom

  2. Nice post again, Tom. I’m enjoying this series. Thanks also for sharing Lanny and Bert’s post as well – it looks like a very interesting reading.

    On the mention of Robinhood, we currently use it as well. This account holds are only current single name security. We’ll be expanding this to other names in 2018.

    The other links to additional sites/posts is also very helpful. I’m going to consider doing this more frequently. Many times, someone has already explored a topic in an effective manner.

    On your other question to the readers:

    – I started investing in the fall of 2005 as a Sophomore in college. I’d just taken a personal finance course elective (which was terrible by the way) that a least got me interested in learning more.

    – My interest in dividends probably picked up steam when I discovered REITs in 2009/10. Something about actually seeing new $$ get posted to my account without doing a thing excited me.

    – About 3 years ago (2015), I read The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor by Josh Peters. Dividends again got my attention because I kept realizing we had no savings outside retirement accounts – no emergency fund, no taxable investments, and little to no short-term savings. This prompted me to make non-retirement savings a focus. However, I didn’t want retirement to lose steam by no longer acquiring additional shares. Hence the accelerated appeal of dividends: even with little to no new capital, existing holdings will continue to grow and DRiP.

    I think I just got my idea for my next post…

    Thanks again.

    • Thanks Mike. I wish I could have included links for everyone that contributes here (including Balanced Dividends), but it just got to unwieldy. I didn’t mean to intentionally leave anyone out. Thanks for your contribution on Robinhood. I have not used it but have heard good things. The Ultimate Dividend Playbook is a great book. I do not read many books, but I read that twice and refer to it often. I loved the Morningstar newsletter, Dividend Investor, when the author, Josh Peters edited that publication. I look forward to following your foray into more individual stocks. Hopefully the DD model portfolios and stock analysis can help you out. Tom

  3. Great post Tom. I will be sure to check out some of your links.
    I started investing in dividend paying stocks late in the game but I am catching up now.

    • Hi and thanks Caroline. I really didn’t get rolling until 40 even though my Dad got me in a DRIP when I was 10. It’s never to late. Tom

  4. Nice article. The one thing to keep in mind is take times. Definitely not a technique to become instant millionaire 🙂

  5. Thank you so much for the mention, Tom!
    The pennies do add up to many dollars (like the picture!)
    This is a great post and a great summary on how to get into the passive income dividend bandwagon.

    • Thanks GYM. Just a little appreciation for being such a loyal contributor. Besides, I loved that post on DIY investing. Tom

  6. Thanks for the shout out! Those are all great steps indeed. I would also add a focus on long term investing to really see the benefits of compounding dividends. Thanks for sharing!

  7. Hello Tom!!

    Your post is well organized with the proper steps to get started. Haha I love the first few where you mentioned DS’s post to beef up your resume to earn more. That’s great! What a nice way to start the new year… wooo!

    Overall, very informative post with great resources and links! That’s such a smart way to show your support to your fellow bloggers! I believe resource posts do very well! 😊

    For me, I’m lacking behind building a dividends portfolio. I don’t hold many single stocks that pay much divs. In fact, the indexes I hold pay more than my single stocks relatively speaking. But my biggest dividend paying stock that gets dripped is my EOP since I work for a bank. Free money too hehe

    Overall, excellent job w/ this post, Tom!

    • Thank you Ms. Panda. It’s never too late or too early to start dividend stock investing and building your portfolio. If I remember from your blog, you are doing just fine never the less. Tom

  8. As usual great stuff Tom! Like it how you explain everything in the most simplest form so anyone can get it. It may have something to do with your being a teacher? That’s just my guess 🙂

    As for the dividend machine, I spend most of my time maintaining it and making sure it keeps on running like a well-oiled machine and keeps spitting those dividends instead of smoke.

    Though, every now and then I have to replace a part and order a new one from a different vendor, but it’s all part of doing the maintenance. I make sure repairs are done promptly to avoid any impact on dividend performance.

    Sometimes, I also get fancy and replace an old part with a higher performance part like a Turbo Charger. Though one must pay attention to quality at all times as one bad part could throw-off the dividend machine.

    I also pay attention to the noises that come from each part in my dividend machine, anything out of ordinary gets my attention and if necessary gets me to take preventive actions.

    One last thing about the dividend machine, unlike any other machine, when designed properly, the dividend machine has a tendency to get stronger and bigger over time while requiring less maintenance.

    Take care and happy blogging.

    • Well said Mr ATM. I think you just wrote an analogy like blog post in your comment. Thanks again for your input on Dominion yesterday. And, I’m still thinking about DivCon 2018 in South Beach. Another sub zero morning here in the Great Mid-Western US. Hopefully the cold weather will benefit our utility stocks. Tom

  9. Awesome post Tom and thanks for the mention!

    I agree with your post. Regarding number 4 (invest on a regular basis), I fully support the notion of making your investments automatic. Sure, you could do it manually and some people even prefer to do it manually. But, making my investments automatic has really worked out for me. It’s one way in which I pay myself first. The money comes into my checking account and automatically goes out to my investment accounts based on the budget that I created for myself.

    The other thing I’ll mention, which I’ve previously said, is that I’m a huge fan of dollar cost averaging. It makes me not have to worry about timing the market, which is super difficult to do. So, DCA is a stress free and easy way to invest in the stock market.

    That was a nice write up. A great way to get started for the New Year.

    • Thanks DP. Glad you liked the post. I built a lot of my investments over the years just like you say, the automatic way. Tom

    • Hi DM. Agree. Reinvesting the dividends is a very important component to building one’s dividend cash flow machine. Tom

  10. Very correctly said Tom. I couldn’t have written any different or better if I were to write up something like this. I totally agree to these steps and I always tell younger engineers to do the same since they are just starting up their financial life journey. Start early is the key and then keep investing regularly keeps the emotions out. I also tell them if you don’t know what to invest in, then invest in S&P 500 index funds but don’t let not knowing stop you from investing at all. Good luck for new year.

    Happy Investing.

    • Thanks TDK. Couldn’t agree more with everything you say. Happy New Year and good luck with your investments in 2018. Tom

  11. This needs to be shared as much as possible!

    What are your views on index investing alongside dividend investing?

    • Thanks RichestMan, My favorite ETF in the dividend space is VYM. I own it along with individual stocks for diversification. I have a couple non US based dividend ETFs to round out international exposure too (PID and DWX). So the short answer is, I think it is okay. But it really could take a different shape/flavor investor by investor. Thanks for stopping by. It is good to hear from you again. Tom

  12. Again, great article! This is the stuff they need to teach in school! Take out the lesson on Pythagorean Theorem and replace it with investing and compound interest. It will be more beneficial in the long run.


    • You are right MH. Funny though, I am an accounting teacher. So I do work personal finance in a little in my financial statement analysis class. Thanks for stopping by. Tom

  13. Great guide, Tom. I’ve been using the robo-adviser M1 Finance for a while, and really like them. Their benefit is that they let you choose your own investments, but, like with other robo-advisers, they also have the benefit of ease – you just deposit money and they do the rest.

    I do get paid dividends with my money there (which are automatically reinvested). I haven’t yet made a deliberate effort to find high dividend-payers – I think I might start with a dividend ETF.



  14. Hi Tom. A wonderful post with many great links. I agree that getting started early is so helpful. Even if one doesn’t feel comfortable with investing early on, the dollar amounts usually start out quite small, so initial mistakes don’t cost much. The knowledge gained from these initial investing experiences will only make one a better investor.
    I started with individual DRiP accounts in the late 1990s. I put in $50 or $100 when and where I could. Over the years, several of these DRiPs have paid me more in dividends than I have invested along the way. The power of dividend reinvesting at work! In 2015, I transferred these DRiPs to a brokerage account and really started focusing on building an entire dividend stock portfolio. Eventually, I hope to stop re-investing the dividends and instead use them for monthly living expenses.

    • Hi ED. Thanks for stopping by and commenting. The path you outline from individual DRIPs to a managing a portfolio through a brokerage account is similar to my story. Mistakes and learning are all part of it too. You learn so much more and faster once you get in the game and have some money on the line. Tom

  15. Nice second post of the series. Something which should be taught at school for sure.

    Unfortunately my broker does not support drips/partial shares so I re-invest everything manually.

    Great post Tom!

    • Hello again Mr. Robot. You are a busy man this evening (Europe I think?). Thanks for getting caught up on your reading here at DD. I wouldn’t worry much about your broker not supporting DRIP. I used to DRIP every holding, but switched to letting most every dividend accumulate in cash. I now reinvest periodically when the cash builds like you. Both approaches are good one’s with their own pros and cons, but I think it depends on one’s goals and personal preferences. Tom

  16. I like this series. It provides a lot of great advice. The best advice is by far to spend less than you make…only then will you have the money available to invest. Now, if only our government could get this simple thing figured out!


    • Thanks for stopping by and the kind words about the posts Scott. Totally agree. Spending less than you make is the basic raw material to this and most personal investing strategies. And I’m with you on the US government financial situation. The deficit and debt trouble me and I only see it getting worse. Tom

  17. I started back in 2013 by reading the original DM. I noticed your comment over on his new site.

    Back when I first started, I was curious about increasing my passive income from 1-2%, to upwards of 3+%. One or two percent, in the long run, can accumulate aggressively. I have open positions in 18+ companies that were slowly built over a couple years. Right now, it’s churning away throwing that passive income off! It is definitely something that I am glad I started doing.

  18. Great article Tom and thanks for the shout out 🙂 This is a great step by step guide to gaining wealth!!! Can’t wait to read more from you 🙂

  19. Dividends are such a useful tool in passive income. I’m purchasing more dividend stocks this year and aiming to double my portfolio holdings.

    • Hello IM. Good luck with your goal to double your dividend stock holdings this year. That is an awesome goal. Tom

  20. Great series. It definitely works and takes time and patience which is the key! Also, I like the part about reinvesting dividends as that always reminds me of The Richest Man in Babylon 🙂

    • Hi SMM, Thanks for stopping by. Hope your new year is off to a good start. I like your point on patience. It’s sometimes tough to find in our world of instant gratification. Tom

  21. Really terrific post, Tom. I can confirm based on personal experience that investing in yourself can really pay off. My income increased dramatically over the last five years as a result of working harder and improving my credentials, and I have been able to invest most of the additional monies into my various passive income investments.

    My job remains my main side gig, at least for the foreseeable future. 🙂

    I am sure you have written about valuation in other posts (I just discovered you blog and am still roaming around), but it is worth mentioning here, given our current frothy valuations. DCA should protect investors but it might take longer to show real gains on stocks purchased now, depending on what the investor buys.

    Great blog!

  22. Great advice Tom! Started stock investment last year and I’m somehow on the right track. It does take a lot of patience and research. This type of investment is not easy money and takes a lot of discipline but is a great way to spend less ( I spend more on buying stocks). This sure is a good passive income, won’t make me an instant millionaire but hope to get me there soon.

    • Hi Nancy, Thanks for stopping by and commenting. Welcome to Dividends Diversify. Stay the course and build your wealth one dividend at at time! Tom

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