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

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