Unlocking the Power of Dividends from Shares: Passive Income

"Someone is sitting in the shade today because someone planted a tree a long time ago" - Warren Buffett

• Passive income streams usually require a lot of initial work and may require constant attention, so it’s not entirely “passive”.
• Investments and side hustles are two broad ways to earn passive income, but you should be patient and expect to start slow.
• Shareholders of a company are entitled to receive a share of its earnings, i.e. dividends, should the company choose to give any out.

Dividends from Shares

If you’re already investing, chances are that you started with shares! Shares represent part ownership of a company. They are issued initially to raise capital to fund a business's growth, remain solvent or acquire additional assets. 

Purchasing a share makes you a "shareholder" of the company, and you are then entitled to receive a share of its earnings, i.e. dividends, should the company choose to give any out, in proportion to the percentage ownership of that company. If the company does so, it is usually distributed regularly, often annually, quarterly or semi-annually. 

Dividends may not be much at first, but as your capital grows over time and if invested in stable or growing companies, this stream of dividends could become a significant source of passive income. It may eventually dwarf the income you earn from your job! And, though you should review your investment portfolio regularly, it really is passive. After all, you're paying the management of those companies to make business decisions for you. You're the boss!

Dividends typically are given out as cash, sometimes with an option to receive them in the form of more shares (called scrip dividends - an excellent way to generate "compound growth" with your investments), though, of course, it also means that you won't be receiving spendable cash. 

You need to decide on this tradeoff - do you take the cash or reinvest it and grow your investment capital a little bit at a time? You could argue that this is how you could build massive wealth over the long term - compounding interest on your deposits at a bank is excellent, but compounding market exposure with time in the market is like turbo-charged compound interest (if you take a long-term view)! If you don't want to pick individual shares and want (as you should) a diversified portfolio, you can participate in this through active or passive equity funds.

Why Diversify?

Diversification is an essential practice for both professional and non-professional investors, used to minimise the risk of financial loss and enhance potential returns over the long term. 

The most common (and practical) way to achieve diversification is to do the following:

• Actively choose to invest in multiple asset classes within a portfolio (even ones that are currently out of favour)
• Actively look to have a higher number of investments within each asset class

At a high level, the thinking is that all assets are unlikely to move in the same direction at once, meaning that short-term losses in one asset class may be offset by profits in another. Overall, a well-balanced and well-managed portfolio (which is not aggressively and constantly being traded!) will usually appreciate value over time.

Other Ideas:

PASSIVE INCOME IDEAS: SHARE DIVIDENDS. COMPLETED. ✅

1. Cover photo from picjumbo