Passive Income Perfection
It should come as no shock that dividends from stocks are my idea of passive income perfection. With a name like Dividends Diversify, how could it be any other way?
Let’s review why dividend stock investing is my favorite passive income.
I RUN MY OWN DIVIDEND STOCK BUSINESS
I have never had the desire to start and run my own business. For those of you who have chosen that path, I really admire your vision and courage. Being a pretty conservative person, it just seems risky for me. I have also heard the horror stories of how much time entrepreneurs put into their businesses. As a result, the concept never had much appeal.
On the other hand, building and owning a portfolio of dividend stocks is a little like running your own business. And, it is the kind of business where I really enjoy being the owner and running the show.
As a former finance and accounting professional, every business I worked at had the goal to maximize revenue at the lowest cost in order to make a profit. In addition, to increase those profits over time. To do that, money was invested in assets needed to execute the business plan and achieve the desired profit. That profit was measured every month on the income statement.
MY DIVIDEND STOCK BUSINESS HAS AN INCOME STATEMENT
Building a portfolio of dividend stocks is no different. I invest capital in assets – dividend stocks. And each investment provides a revenue stream from recurring dividend payments. There are only two out of pocket expenses.
- Transaction costs to buy & sell shares
In addition, there is an additional type of cost we will also talk about. It is called the opportunity cost.
First of all the revenue from dividends minus the two expenses equals my profit. Just like any other type of business, that is my income statement. However, my business isn’t very risky. In the 15 years running my dividend stock portfolio, I have always turned a profit based on this definition. Most noteworthy, it is the same definition other businesses use to measure their profit.
DIVIDEND STOCK BUSINESS REVENUE
When I invest capital to generate dividend revenue I look at two things. First, how much is the current dividend? In other words, the dividend I expect to receive based on the current level of payments from the company. I also estimate how much the dividend will grow in the future. I explain this process in more detail in the post Dividend Deep Dive.
It is like building an annual revenue plan at any other business. Management sets a revenue target. Then, determines the factors to achieve the target. They invest money, execute their business plan, monitor progress and make adjustments. Predictable revenue is one reason I like dividend stock investing. Furthermore, it is passive income perfection to me!
DIVIDEND STOCK BUSINESS EXPENSES
In addition, I have control over my expenses. By consolidating all assets at one discount stock broker and limiting trading, I incur near-zero transaction costs. Limited trading also minimizes capital gains taxes. These taxes are only payable when a dividend stock is sold. I try to buy and never sell. But, just like other businesses, I do pay taxes on my net profit, dividends in this case.
Every business also has opportunity costs. By definition, if you choose to be in business “X”, you forgo the profits of being in business “Y”. My business is no different. It has opportunity costs. By investing in dividend stocks, I forgo profit I could make in other types of investments. Opportunity costs do not appear on an income statement. But they do exist in theory. Just ask your favorite economist over a beverage sometime.
EQUALS PASSIVE INCOME PERFECTION
In conclusion, that’s my idea of passive income perfection. I like buying individual stocks. On the other hand, you can get more passive by investing in an exchange-traded fund composed of dividend stocks. My favorite is the Vanguard High Dividend Yield ETF (VYM).
Do any you think of dividend stock investing this way? Do you have a different favorite form of passive income?
In addition, you can follow a couple of savvy dividend stock investors over at the Dividend Diplomats blog.
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