Dividend Investing 101: What Are Dividends?

Have you ever wondered how rich people always seem to make money, even when not at work?

This magical existence is what we call “passive income.” One of the major types of passive income is dividends, along with rents, royalties, and automated business.

But what are dividends, and why should you care about them? You’ll need dividends if you want any chance of remaining in the middle class or growing into the wealthy class.

I Have Everything I Want in Life.. And Then Some

What are dividends? Dividends are profits from a company that they divide among shareholders. Let’s take a simple example.

Say you own a dog-walking business and earned $10,000 in revenue in December. You pay your employees ($2,000), expenses ($2,000), loans ($2,000), and savings ($1,000).

That leaves you with $3,000 of free cash flow. You have three shareholders, which are your three children.

You decide to pay them a dividend of $500 each and keep $1,500 towards reinvesting in the future of your business. This is the process of dividends, in a nutshell.

How Would You Invest $300,000?

Large companies, large dividend payouts. We are talking about massive companies with billions of shares on the stock market.

However, the process of paying dividends is the same. The companies pay their payroll, expenses, capital expenditures (future investments), research & development, etc.

What they have left is free cash flow. The company then pays a dividend from its free cash flow. The trick is balancing their free cash flow and dividend payments so they don’t over-commit to these expenses.

Why should you care about dividends? Most investors do not care about dividends, passive income, or the power of compounding.

Human nature gravitates towards the “bigger fool theory” or the capital appreciation method of investing.

Five Takeaways from “Passive Income, Aggressive Retirement”

Capital appreciation (and capital gains) investing sees you buy something, hold it for time, and sell it at a profit (hopefully).

Most people do this with stocks, homes, wine bottles, Pokemon cards, or vintage automobiles. We like this method because it makes us feel smart about our choices.

Dividend investing requires a different mindset. You simply purchase a proven stock and let it do all the work. It will pay YOU to hold it—that’s it.

The difference between rich and wealthy. There is a massive difference between rich and wealthy people. 

Over-Budgeting 2: Low Expenses, High Income

Rich people have assets, and wealthy people have assets that produce income. Rich people talk about asset prices, “My house has $300,000 in equity.”

Wealthy people talk in terms of cash flow, “My rental property clears $500 per month.” Dividend investing is all about creating cash flow to use today and tomorrow. 

Cash flow is the most critical part of running your household, similar to a business. Dividend investing aims to focus on your income by increasing your cash flow.

I’ll discuss integrating dividends into your life later in the series. Just know that if you want to survive in this new dog-eat-dog world, you’ll need more cash flow than ever.

Over-Budgeting: You Can Only Cut So Much Before You Bleed

Qualified vs. nonqualified dividends. Not all dividends are created equal. Some dividends are “qualified,” which means they receive preferred tax treatment from the Internal Revenue System (IRS).

If reducing your taxes is a big part of your investment philosophy, you will want to search for companies that pay qualified dividends.

Usually, big blue-chip companies like McDonald’s (MCD) and Starbucks (SBUX) pay qualified dividends. Real Estate Investment Trusts and other ETFs usually pay non-qualified dividends.

The IRS taxes non-qualified dividends at the ordinary income rate. So whatever tax bracket you fall into, that’s what you will pay on these dividends. 

The Woman’s Guide to Investing

What is dividend yield? As you begin your dividend investing journey, you’ll run into the term “dividend yield.” Sometimes it will be low (0.7%) and other times high (12.4%).

Starting out, you want to invest in solid dividend-paying blue-chip companies that have increased their dividend for multiple years. You can find a list of Dividend Aristocrats here.

For beginners, I would aim for companies that pay 2-4% in dividends. This is a healthy growth payout and will help with compounding.

You may want to dabble with higher-yielding blue chips like Altira (MO) or Kinder Morgan (KMI) as you become more seasoned. I have a list of my 24 favorite blue chips in this article.

Become a Lifelong Learner. Become Rich

Higher-yielding stocks usually sacrifice growth because they pay shareholders more cash flow. 

Remember your dog business. Say that instead of saving $1,500 to reinvest, you only saved $500 and paid the rest to shareholders. 

The shareholders would receive more cash, but my business wouldn’t grow as much. You must look at what you need from your investments (growth, income, both).

Is dividend investing difficult? Dividend investing may be the most straightforward type of investing out there. You are investing in proven companies that you already may know.

Five Takeaways from “How to DeFi- Beginner”

Companies like Verizon (VZ), AT&T (T), Prudential (PRU), Pepsi (PEP), Wells Fargo (WFC), Coca-Cola (KO), Pfizer (PFE), and Johnson & Johnson (JNJ).

The most challenging part is shutting out the news cycle. The talking heads receive payment for attracting eyeballs. To get eyeballs, they need to create news.

You can fall victim to this over-analysis and start trading your stocks out of fear. Here is a quote for you. “Your stock portfolio is like a bar of soap; the more you handle it, the smaller it becomes.”

Can Grammarly Make You a Better Writer?

Conclusion. Eventually, you can become an income investor, a step beyond dividend growth investing.

Income investors focus on finding excellent dividend yields from lesser-known products, funds, and companies. But that is a story for another day.

I have been a dividend investor for four years, which has changed my life. My wife and I earn $1,500 per month in dividends.

The Magic of an Automated Business

This is a life-changing amount of money because it comes in whether we work or not. It comes in rain or shine, no matter what the stock market is doing.

I have written hundreds of articles on dividends, but I will refer you to some of my earlier works. In these articles, you can get some of my raw excitement from close to three years ago.

1. Stock Market Investing 101: Capital Appreciation Method
2. Stock Market Investing 102: Dividend Growth Investing
3. Stock Market Investing 103: Appreciation/Growth Method
4. Stock Market Investing 104: Reach Your Passive Income Goals
5. Stock Market Investing 105: Pick Your Platform
6. Stock Market Investing 106: High-Yield Alternative Investments
7. Stock Market Investing 107: Back to Basics

The best way to jump into dividend investing is with your Cash App and $100. You can literally invest $5 per week and start earning passive income. But more on that later. Good Luck!

1. PDF of the Month: Don’t Gamble with Retirement 10 (Free 419-Page PDF)
2. Free PDF Downloads: Download FREE PDF LIST here
3. Financial Mindset: Become CEO of Yourself 2 (Free 196-Page PDF)
4. Retirement Planning: Your Retirement Planning Guide 2 (Free 255-Page PDF)
5. Investing: How We Plan to Retire on Dividends 4 (Free 139-Page PDF)
6. Cryptocurrencies: Counting on Crypto 2 (Free 159-Page PDF)
7. Real Estate: Financial Independence through Real Estate 4 (Free 112-Page PDF)
8. Business: Retire Rich, Retire Comfortable with a Business 4 (Free 149-Page PDF)
9. Latest DGWR: Don’t Gamble with Retirement 10 (Free 419-Page PDF)
10. Everything!: The Biggest Book on Passive Income Ever 3! (book)(Web Edition)(Art Edition)
11. Writer’s Comparison: M1 Macbook Air vs. GalaxyBook3 Pro 360
12. Read My Books for Free: Free Kindle Books Schedule
13. Book Design: Design Tips on YouTube
14. Kindle Unlimited: Why I Finally Subscribed Kindle Unlimited (learn more)
15. Book Reviews: 505 Takeaways from 101 Books (pdf)
16. Writing: The Publishing Chronicles (Part 1, Part 2, Part 3, Part 4, Part 5)
17. Best REIT- Fundrise: Fundrise vs. US Treasuries (Join Fundrise)
18. Follow us: On our Facebook Page and Join our Facebook Group
19. Support the Channel on Cash App: $Kingmarine1981
20. For more detailed analysis, join my Youtube: MFI YouTube Channel