Saturday, January 19, 2008

Why dividends?

I believe that creating a passive income stream through dividends is an achievable, intriguing and stimulating way to decrease my dependency on the salary income, which is over 95% of my income at the moment. The remaining 5% comes from interest income from CD's and my interest checking account at Schwab, credit card rewards and signing up for offers online. After doing some research, i have found that putting your money in bonds, cds and money market funds will only be enough to meet inflation and over long periods of time exceed it by a couple percentage points on average.

Stocks on the other hand offer you the best possible investment opportunity out there. Over 30-35% of stocks performance over the past 50 years has been attributed to dividends; the rest comes from capital gains. If you take a look at the S&P 500 from 1957- 2005, the dividends have grown on average of 5.3% per year for the index. A $1000 investment in the S&P500 in early 1957 would have provided you with an annual dividend income of about $40. In 2005 your dividend income would have grown to $610, assuming that you spent all your income. Furthermore your investment would have been worth over $32,000 by the end of 2007. With inflation assumed to be averaging around 3 - 4% per year, your investment in dividend paying stocks would provide you with an income that keeps its purchasing power year over year, which unlike fixed income securities, can also provide you with capital gains.

My strategy involves saving around half of my paycheck and investing it in the dividend achievers and high yield dividend achievers that show consistent increases in dividends over time and the ability to cover those dividends in the future. I will have my screening method and my goals for passive income on my next posts. I would also try to describe my current net worth, and how it is invested. I hope that this blog will serve as an inspiration for people and that it would change their financial lives for the better.

Relevant Articles:

- Dividend Aristocrats List for 2009
- Dividend Aristocrats
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Best CD Rates

7 comments:

  1. Hi there, I just found your blog and have found the posts here very well-researched and informative. Looking forward to hearing more of your experience, and hopefully will have some of my own to share too!

    ReplyDelete
  2. Liana,

    Thanks for stopping by. My goal is to assist investors in their ongoing education.

    Good luck!

    DGI

    ReplyDelete
  3. I read your blog on a regular basis for the past 3-4 months. Very stimulating and very well researched.

    Naveen R

    ReplyDelete
  4. Hi,

    I like your blog, its very useful for me, because I have no experience in the stock market and I have learned a lot from you.

    I just have a question: have you considered creating a corporation?
    Read from "Rich dad, por dad" that corporations can avoid taxes more than a single sivilian.

    thanks

    ReplyDelete
  5. I found your blog a few weeks ago and I've been reading through the old posts.

    I've been quite interested in dividend stocks since I found that my brokerage will automatically reinvest my dividends without fees, and allows me to purchase fractional shares. (Sharebuilder)

    Your site is really informative and I think it's great. Keep up the good work!

    - Jason

    ReplyDelete
  6. Hello,
    I am looking to invest some money and have no clue as to what to do. I am just learning about the terms being used and find myself confused most of the time. At this point in my life I know I need to invest in order to have a passive income but I just haven't found the right outlet. From what I have read so far it seems that stocks are the best bet but how do you narrow down which stocks to invest in?
    Toni

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

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