Passive Level: Green

Recommendation: Good fit for hands off, sustained growth

What are Dividends?

Dividends are a great way to earn passive cash. A dividend is the distribution of a part of a company’s earnings that is paid to its shareholders. Dividends are typically paid monthly, quarterly, or annually.

Remember to take into consideration DRIP(dividend reinvestment). This means that you can reinvest the dividend you receive back into the stock. Monthly dividends compound quicker, and therefore, your shares accumulate at a faster rate if you were to reinvest the dividends. You can see for yourself using a compound interest calculator. DRIP is great when you get started in dividend investing. Once you have established a significant portfolio, you can then use dividends as income.

Please be cautious when looking at the dividend yield. Generally, the higher the yield, the more risky it may be for you as a shareholder. Stocks with dividend yields greater than 10% can be seen as risky investments. Often what happens is that high dividends can draw in investors, but often the actual stock value declines, sometimes rapidly, leaving you with a lower investment overall. Here is a list of high dividend stocks by yield and high dividend exchange traded funds by yield.

There are two types of dividends, qualified and non-qualified. Most regular dividends from corporations are qualified. One example of non-qualified dividends are dividends paid out by REIT(real estate investment trusts). The main takeaway between the two are that qualified dividends are taxed at capital gains rate, and non-qualified dividends are taxed at a person’s regular income tax rate. One core fundamental of investing in dividend paying funds is minimizing taxes.

Taxes and Dividends

If you want to avoid dividend taxes altogether, investing dividend-paying stocks in a retirement account is the way to go. Retirement accounts such as a 401(k) and a Roth IRA are two such examples. Within these accounts, your dividends will grow tax-free. If you were interested in investing in REIT funds, holding these in a retirement account may be ideal. However, there are some advantages to holding REIT in a taxable account.

There are some exceptions. Municipal bonds are typically exempt from federal taxation regardless of income. Some examples include iShares National Muni Bond ETF(MUB), VanEck Vectors High-Yield Municipal Index ETF(HYD), and Vanguard Tax-Exempt Bond ETF(VTEB).

Where to Invest?

Finally, if you’re ready to earn dividends; Robinhood offers users a platform to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop. In addition, Robinhood also offers fractional shares(ability to purchase a share like Amazon for as low as $1), cash management(earn interest on your uninvested cash), DRIP(dividend reinvestment), and an IRA(retirement account with 1% match). Sign up at Robinhood-Referral and get up to $200 in free stock.

The Good

• You have an opportunity for compound growth.
• You truly do this in your sleep.
• Once you have enough invested it’s a source of income for life.

The Bad

• Be careful of high dividend companies. Do you due diligence!
• In bad years some companies take away or reduce their dividends. This will affect long term growth.

The Skinny

This is one of those rare income streams that is truly passive as long as you can accept some risks. If you do your research and watch your taxes this is a great hold and watch source of passive income.