A few years ago we realized the wealth we could create would always be limited if we continued trying to build it in the traditional way. By ‘traditional,’ we mean the way our parents taught us and their parents taught them. There’s a good chance it’s the way your parents taught you, too: trading time for money. Essentially, trading time for money means you go to work for several hours most days and someone pays you for the time you spend there. Because we all have only 24 hours every day, we’re all limited in the amount of money we can earn using that model.
We wanted more.
We began to talk about ways to build wealth while on vacation, or watching a movie, or hanging out with friends, or… asleep. Early on in this journey (and it really is a journey), we learned there was a term for what we were looking for – “passive income.” While there are lots of ways to earn passive income, the one that appealed to us most was buying stocks that pay dividends. To be honest, some of the early appeal was that we both had experience investing in the stock market so it didn’t seem scary to us. In this blog, we hope to narrate our journey to share what we’ve learned with anyone who might want to do the same. Remember, writing a book, selling a product online, affiliate marketing, real estate (though that one isn’t completely passive), and lots of others are all ways to earn passive income. We would never claim that investing in dividend-paying stocks is the best method, it’s just the option we chose. We happen to think they’re the most passive as well.
A dividend is a payment a company makes to shareholders as a way to distribute a portion of its earnings. Dividends can be paid as cash payments or in additional shares of stock. Start-ups and other companies that want to grow quickly rarely offer dividends because they reinvest their profits to finance their growth. Larger, established companies tend to pay regular dividends as a way to attract and keep shareholders. These are the companies we want to own.
You would be forgiven for asking how a company’s decision to pay a dividend can affect the share price. Basically, shareholders are less certain of receiving the benefits of future growth that might result from reinvesting profits than they are of receiving current dividend payments. Investors place a higher value on having a dollar in their pocket today than on a dollar which may (or may not) be paid some time in the future. It stands to reason, then, that they are willing to pay more for a share of the company.
When you combine the stability of large, blue chip companies with the near-certain income stream of regular dividends, you get a recipe for a money-making machine you can use to build your financial independence. If building a stream of dividend income is something that interests you, we hope you’ll find our blog helpful.