Time to look at our 5th possible income stream, which is dividend income. This type of income is based on company profits paid out to the shareholders of that company. Before you dismiss this type of income as not your thing, read on and then jump to the investing steps later on, as you’ll find that investing can be more or less risky, depending on the risk that you feel you can deal with and you can start with very little money, yet over the years build up a considerable portfolio.
Now back to the dividend income. If you have shares in a company, you basically own a tiny part of that company. If that company then makes a profit, some of that profit goes to the owners of that company, i.e. the shareholders.
Dividend income is a key passive income as you don’t need to do very much to earn that income, apart from selecting the right stocks (which indeed can be time-consuming if you want it to be, but doesn’t actually have to me – more on this in the stock market steps).
Of course, it isn’t always as easy as that, since if the company doesn’t make a profit, then the shareholders won’t get any dividend either. Worse, the company might go bust, in which case you not only won’t ever get any dividend payments anymore, but you would have also lost your investment (the money you paid to buy the shares) into that company, meaning you won’t be able to sell those shares anymore to generate a capital gain.
But when you do get dividend from your shares, it is a great way to make some extra money, or – with time – a lot of extra money. When you get dividend from your shares, you can reinvest this immediately into the stock market again, meaning you buy another small part of a company. The more you own of a company, the more you will get when dividends are paid out (based on the percentage you own), the more you can reinvest again into that company (or another company). It is basically the same as compounding money from interest on savings.. Over time you keep getting dividend on the dividend that you reinvested.
Why not just stick with savings though if you pretty much guaranteed will get your interests, whilst with shares, you might not get anything if the company doesn’t make a profit?
- Dividend payments are generally far higher than the interest rate you get on your savings account. (Higher risk usually means a higher return).
- Shares don’t just offer the possibility of dividend income but also of capital gains income as we discussed in step 36, if the price at time of selling them again is higher than what you originally paid for them.
Whether or not you want to pursue this line of income in the future depends to a large extend on whether you feel comfortable investing money at the risk of losing (some of) it over a long period of time.
Step 37 – Income Stream 5: Dividend income – in detail:
We will look at shares and the stock market at a later stage in our mission, so you don’t need to suddenly go out and buy shares if you don’t want to! But if you have always felt that investing “wasn’t your thing” and is only for people who “have so much money, it doesn’t really affect them if they lose it all”, here are some small steps to get you started thinking about this possible source of income again:
- Ask people in your environment whether they have any investments. Obviously you have to feel comfortable asking them this, so think about friends, family, colleagues or acquaintances who don’t mind discussing finances with you. Think of the following questions to ask:
- Do they or did they use to have investments?
- How long have they been investing for?
- Would they recommend investing to other people?
- Why or why not?
- What is their long-term plan with investments?
- Later on you will discover there are different ways of investing money, some carry more risk than others, so don’t worry if you are getting a lot of different opinions from various people. In fact, if you are finding you are either getting only positive OR only negative responses, keep looking until you find somebody who gives you a different opinion. If later one you do decide to start investing, you want to have at least one or two people you might be able to ask for tips and help, so knowing who has experience investing and is happy to talk to you about it will help you later on.
- Investing is never without risk, but can be a decent income provider, so you want to make sure you have a good understand of both the risks and advantages of stepping into the stock market.
That’s it for now! This step is all about informing yourself more, as investing is a huge area of finances, so as promised, we will get back to this a little later with some individual steps on what’s involved. Until you know more about it, it would be unwise to make any decisions on this front, so most important for now is to inform yourself and get a rough idea of what investing is.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.