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.

The nice part of dividends is that you continually build share or can use the dividend for income. Remember to take into consideration DRIP (dividend reinvestment plan). 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 there are so many places!

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 and get up to $200 in free stock.

SoFI will give you $25 for starting an investment account.

Trading View will give you $20 for signing up.

Axiom will give you 10% off your trades to trade your favorite crypto.

Acorns is a great robo-investing tool to setup an automated way to invest so you can set it and forget it. Get $5 now for signing up.

Go to Public to earn an invite-only rebate rate of $0.10 per contract traded.

At Gemini trade at least $100 to earn $75 in the crypto of your choice.

Fundrise, just enter your email and earn a $25 voucher when you sign up.

Interactive brokers is one of my favorite trading platforms. Open an account today and start earning up to $1000 of IBKR Stock for free. Another one for more advanced users is TastyTrade.

MoneyLion is a helpful app with great features like cash advances, credit-building loans, and investing tools. The MoneyLion proposition bundles no-fee checking with investing and borrowing through a digital offering that educates, rewards, and supports members in achieving new financial goals.

I signed up for Energea to get dividends from investing in renewable energy developments.

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.

Dividend Investing for Lifelong Income