3 Reasons I Love Dividend Stocks as Passive Income Ideas
There are many passive income ideas out there. Not all are created equal – or even remotely equal. One of my favorite passive income ideas is to invest in dividend-paying stocks. But not everyone understands dividend stocks or their potential to generate extra money for their owners. Here are three reasons I love them.
1. World-class companies
If I put money in a bank account, I basically get the payment the bank receives from other customers to borrow it, minus the bank’s commission. In a competitive financial services market with low interest rates at the moment, that means my likely passive income will be pretty meager.
By contrast, investing in dividend-paying stocks allows me to benefit from large, well-established companies generating substantial profits. An example is British American Tobacco. One of the world’s leading tobacco companies, its shares are currently yielding 8%. In other words, if I invested £1,000 today, I would expect to receive £80 in dividend income per year.
Now there is a risk that will not happen. Dividends are not guaranteed and as cigarette consumption declines, British American Tobacco’s profits could decline as well. But by diversifying my passive income streams across a number of stocks, I seek to benefit from the business expertise of successful companies. I expect this to offer better possible returns than bank interest.
2. Entrance and exit
I am an investor, not a speculator. So I don’t try to get in and out of stocks quickly. Instead, I aim to choose companies that I believe have strong long-term potential. I then buy them in my wallet to keep them.
However, that does not mean that I never sell. Of course, circumstances can change and a company’s outlook can vary from year to year. If I’m starting my own business to generate passive income, getting in and out of it might not be so easy. Even if the idea was really passive, it would probably take me time and effort to establish it. Then, if I wanted to get out of it, I would have to find a buyer if I wanted to try and get my investment back.
With stocks, on the other hand, the start-up time is minimal — and that’s also true when I decide to end my investment. I can put funds into a stock the same day I decide I like it. Likewise, when I think it’s time to sell, I can take action immediately.
3. Passive income and business studies
Owning dividend stocks allows me to get income without working for it. But that doesn’t mean I never spend time developing my passive income ideas.
I tend to take the time to read company performance when evaluating what might be good opportunities for me as an investor. Over time, this reading can help me learn not only about the company in question. It can also give me a growing education in business and finance in general. It’s not an MBA, that’s true. But it’s still free, hands-on training based on real businesses. For my personal development, I think it can be very useful.
Christopher Ruane owns shares of British American Tobacco. The Motley Fool UK recommended British American Tobacco. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.