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
- Taxes
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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Mr. Robot says
Hey Tom, that is what I like about dividend stocks. They are truly passive. You invest some time in selecting which one and from there on its virtually driving itself.
For all other things like running a blog, side hustling is far more time for money then stocks. I like it 🙂
Tom says
Couldn’t agree more Mr. Robot. Once you have a watch list and a few dividend stock holdings, there isn’t much of a time commitment. I like that too. Tom
Miguel (The Rich Miser) says
Hi Tom,
I think it’s a good way to see it. I also like the fact that, as far as I know, good dividend stocks historically have a great record of price appreciation.
Cheers,
Miguel
Tom says
Hi Miguel, You are right and I think the price gains are under appreciated by many. I’ve found that good dividend growing companies stocks will appreciate by as much as the dividend grows over the long term. That’s why a solid company whose dividend yield is 3% and grows it 8% per year always seems to yield around 3%. Because the stock price increases on a similar path as the dividend increases. Anything can happen in the short run, but over the long run, this is what I have found with my holdings. Tom
Simple Money Man says
Time, risk, stress, etc. are all reasons why I didn’t want to start my business when I earned my CPA many years ago. Family and friends often said I should, and I always kind of nodded my head. I like how your treating dividend investing like running a business. It does have the major components and you can be the CEO, CIO, and biggest and only shareholder too. 🙂
Tom says
Hello SMM, I didn’t know you were a fellow CPA. I never even considered starting my own accounting business. For all the reasons you mention and as a small accounting firm, you need to do tax work. That was never my interest or expertise. As you say, I’m the boss and only employee of my little business here. If I don’t want to do something, I just tell the boss what I really think of him. Tom
Helen says
Hi Tom, managing the dividend stocks is a good business.
I don’t have any interest to be an entrepreneur either. To me, that’s too much risks, and too time consuming. I saw some friends running a restaurant. They work 7 days a week.. The only time off is probably Thanksgiving and Christmas. That’s brutal.
Tom says
Hi Helen, Yes the restaurant business is brutal. I worked at one during high school and college. I’m also now reading the book Kitchen Confidential by Anthony Bourdain. He highlights a lot of the craziness your friends probably experience. Tom
Rob @ Passivecanadianincome says
great way to look at it Tom.
Solar income is probably my favorite, but it sucks in the winter and doesnt appreciate like stock values!
cheers
Tom says
Hey Rob, Your the CEO of your own passive power company. No issue with that. Tom
A Frugal Family's Journey says
We love our dividend income stream as well! In addition to the benefits of liquidity, it is nice to see the dividends roll in each month. That said, we still would like to add a rental or two to our assets. We have friends who own rentals and the cash flow from them can be real nice! Especially once the mortgage on them is paid off. 🙂
Thanks for sharing. Best wishes and continued success on your journeys! AFFJ
Tom says
Thanks for the well wishes AFFJ. Good luck with the real estate ventures. That’s not something I personally would be interested in, but many have had great success with the cash flow created by rentals. Hopefully you will too. Tom
GYM says
I love dividends. I got $850 this month so far from my dividends (mind you, in Canadian dollars, so it’s like peanuts for USD) but still better than nothing! All I had to do was … well, nothing! The best form of passive income!!
Tom says
Hey GYM. Keep up nothing and you will have something. That’s my kind of passive activity. Tom
Mike @ Balanced Dividends says
I’ve never been keen to start my own business. I’m considering different forms of side work, aiming to increase income earned in my current full-time, primary job, and think of other ways to retain income. Ultimately though, the aim is to feed the dividend machine.
I hadn’t consider passive income as running my own business per se, but I do like the points you’ve covered, Tom. As we’ve shared, most of our current passive / dividend income comes from funds, but I’m eventually envisioning a 20/80 split (individual names vs. funds). From there, who knows? – Mike
Tom says
Hi Mike. Thanks for your thoughts. I’m looking forward to seeing some of the additional individual names that you add and how your individual dividend stock portfolio comes together. I’m a believer that both individual names and funds can and should have a place in an income portfolio. And that includes bonds for stability of principle as well as diversification. I think you see it in a similar way, but our allocations to the different areas will surely be different.
Tom
HP @ FTD says
That’s how I viewed it when I started dividend growth investing – a great way to earn passive income. In a matter of a few years, I’ve amassed $10k+ lifetime dividends from this “side” portfolio alone. All of it has gone into building more and more dividends.
Tom says
Hey HP, It is a great deal. Kinda like free money. Need to get more folks like us on the dividend stock train. Tom
Caroline says
Hi Tom,
Dividend is the best kind of passive income, got to over $6000 so far this year and what did I have to do? Not much! Great business to get into.
Definitely passive compare to my rentals!!!
Cheers
Tom says
Glad you agree Caroline. Congrats on the $6K. Tom
DivvyDad says
Thanks for sharing your perspective Tom. I’m in agreement that dividend investing is passive income perfection, although I never looked at it as running a business. In my younger years, I was constantly pursuing side hustles and entrepreneurial ideas but they were a ton of work beyond the day job and I ended up burning out. As I’ve aged, I began to value maximizing my income and minimizing my expenses instead and now have added DGI to that mix.
Tom says
It’s interesting DD how many of us, as we get a little older, settle in to what we do and focus less on potential distractions. Spending less than you make and investing the excess in quality assets is a time tested proven formula to build up the finances. Sometimes it just takes a few years of personal experience to figure it out. Tom
Kale says
Although a portfolio of dividend stocks takes time to build its a great passive income stream I wish I’d started earlier. Much less scary for newbies then real estate investing.
Tom says
Hi Kale, Great to have a new contributor. Welcome and of course I agree. Less scary than growth stock investing too. At least, when we hit the next correction or bear market we still get paid most (if not all) of our dividends while we wait for prices to recover. I’m glad you have your DG portfolio up and running. Better a little late than never. Tom