Passive income is a beautiful concept. The idea that you can make money while you sleep, while traveling, while doing what you love. It is the goal of many people, and mine as well. If you can achieve financial freedom through passive income, you can truly have time to do whatever you want, whenever you want.
Many have achieved this before, but now it is our turn! Now, if it was easy, everyone would do it. But it isn’t difficult if you control your impulses and are willing to put in the work. I am going to show you how to build passive income.
Building Wealth With Passive Income
There are two kinds of income: Passive income and active income.
Active income is the paycheck you get from your job, or your side hustle. You must be actively working in order to receive your money.
Passive income is money that you get from not doing anything. Typically this requires either a higher start-up cost, or time.
If you don’t have an idea what the best types of passive income are, check out my article here: https://dividendsforbeginners.com/what-is-the-best-passive-income-source/
Why Are Dividends a Good Passive Income Source?
For those who have only looked a little bit into dividends may not see the potential that they hold. I have heard people who invest in real estate say “Go ahead, earn your $2 a year. I’ll collect my rent every month.” Renting is a great option, but dividends are an amazing source of income.
The key to dividend investing is patience. In order to maximize your dividend income, you should both put away a monthly allowance towards your dividends, and reinvest the dividends that you earn. That means you will not reap any rewards you sow for years, perhaps even decades depending on what rewards you want to reap.
The longer it compounds, the longer it multiplies. Every year makes a huge difference. It’s much like how two times two equals four. Four times four equals eight. Eight times eight equals sixteen, and so on. Eventually during the years, you will reach the point where you started from two times two, and you may be at 384 times 384, and it is like nothing.
I’m sure you have heard of Warren Buffett, an excellent value investor. However, he is also a dividend investor. He holds a massive portion of Coca-Cola, Wells Fargo and more in his portfolio, which are great dividend stocks. He continuously collects passive income every quarter from his dividends.
Below you will find a chart of the dividend-paying stocks that Warren Buffett owns as of 2019:
Warren Buffett has all of his stocks invested in a holding company he created called Berkshire Hathaway. In the list above, you see the amount of money that Buffett collects from dividends each year. From Wells Fargo alone, he collects three-quarters of a billion dollars each year.
Is it unrealistic to achieve these expectations? Absolutely. But can you achieve a great source of passive income from dividend-paying stocks? Absolutely.
How Do You Build Passive Income With Dividends?
Finally, the meat and potatoes of this conversation. I can define this in three easy steps:
- Invest In Quality Dividend Stocks at a Fair Price
- Reinvest Your Quarterly Dividends and Contribute a Monthly Allowance
It sounds simple, but so many people struggle to do it. You don’t just wait a few weeks. You don’t just wait a few months. You don’t just wait a few years.
In order for compound interest to take effect, you will need patience. You will need temperament. Control your emotions. YOU WILL be in it for the long haul.
If you want financial freedom, you need to make smart decisions with your money NOW.
Let’s take Warren Buffett again.
Warren Buffett began with $5000 at the age of 14. By no means was he handed everything on a silver platter, he simply worked and made money. He also invested his money and helped local businesses, and racked up $5000 by the age of 14.
It took him seven years, and he quadrupled his money. $20,000 sounds like a little bit for Buffett, but you will see how it works.
By age thirty, he was worth $1 Million. That sounds like a lot for thirty, but look at how it compounded! $1 Million looks nothing like the billions he has today.
If he would have stopped at age thirty, he would never have achieved the success that he has.
I understand your concern. “I don’t want to wait until I’m 70 before I start enjoying my money.” I’m with you. I’m not waiting that long. But look at what you can do in 30 years, or 40 years. Depending on your age, there is a lot you can do! If you start with more than Buffett, and invest monthly more than Buffett did, you may be able to gain at an even faster rate. He was a multimillionaire by the time he was nineteen years in, who says you can’t?
The amount of income you get depends on how long you are willing to wait. It is very tempting to keep waiting, because each year the multiplier grows more and more.
Don’t just jump into a dividend stock. Evaluate it first. Analyze it. Make sure it is good for you.
Dividends aren’t the only source of passive income, but they sure are a good one.