Dividend stocks: a way to build a passive income

Dividend stocks

Dividend stocks

Dividend Stocks

What are dividend stocks?

Dividends stocks are stocks of companies that share the profits  with their shareholder. So let’s say company A had made a profit. Let say the profit is 100 USD. And let’s say that company A have only 100 stocks standing out on the market. They decide that want to share ( which is often called as distribute) the 100 usd profit to the 100 stocks. So this means if you had one stock of this company A, then you will get a dividend ( company A’s profit ) of 1 USD. If you own ten of these stocks then your dividend would be 10 USD.

Type of dividend stocks

There are many types of dividend stocks. I will just discuss the most popular types with you.

1. Normal Growth Stocks

Normal growth stocks are stocks of companies that are focusing in growing their business. Most of the time they give you very little dividends. The reason for that is that company need the profit to invest in growing their business. When they see that they have  too much cash reserve, they are starting to increase the dividend or buy back stocks. This way they increase the value of their stocks. A few examples for growth stocks are Apple, Google, Facebook stocks and so on. These company usually give out dividend once or twice a year.

2. Close end funds

Close end funds are funds that are managed by the managers of a investing fund. Close end funds borrow money or give out in stocks ( to get capital) to invest in companies, stock markets, forex markets and so on. By investing in the right things these managers make profits. And with these profits they share it with their shareholders right away or as soon as possible. Most close end fund give dividends quarterly or monthly. To avoid heavy taxation, these funds share 90% of their profit with their share holders.

3. REIT funds

Reit funds are a bit like close end funds. But the main difference is that these funds are primarily focussed on real estate or mortgages. These funds makes their profit by collecting rent , buy and sell real estate, giving out mortgages and building and leasing of properties.

How to build up a portfolio of dividend stocks?

Before you start working on building your dividend stocks portfolio, you need to make clear to yourself what the purpose is of this portfolio. For example do you want that this portfolio to cover all your life expenses or do you want to replace your income. Once you decide what you want. Then you can start on working building up this portfolio of dividend stocks.

How to manage the risk?

So what is the best way to manage your risk? Before you start buying, make a list of stocks which one has the highest yield, research their business and the market that they are operated in. Don’t put all your money in one dividend company but invest in a few. This way if company A one day reported that they want to reduce the dividend it won’t hurt you hard. ( it will hurt you because you get lesser dividned and stock will lose their value) Because still have company b, c,d that are doing well. Another tip is when you research take a look at the dividend pay out history. If a company miss the dividend pay out often, then I highly recommend you not to invest in this stock or fund.

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