How Stocks Can Be A Second Source of Income
I’ve been looking to start a second stream of income for a while now. I have already invested in mutual funds, but they are more for combating inflation and growing my savings, not really for generating income (or at least that is how I intend it to be).
Ideally I want to start my own business. But not having spotted a good business opportunity yet, I decided to practice dividend investing. I’m hoping this can help me get some income while looking for a business that I can get into.
So what’s dividend investing?
As it sounds, it’s investing in stocks that give dividends. I buy stocks, and they give me dividends. It’s a rather simple approach. But it has a lot of benefits compared to just buying any other stock:
- Dividend-paying companies tend to be more mature and stable. Everything in the stock market is a gamble. But in the land of risks, they’re some of the “safest”.
- I’m building a way to have passive income. Whether the price goes up or down, I still get paid my dividends.
- It’s a viable path to increasing wealth:
- In bearish markets, the dividends can help offset losses. In bullish markets, the dividends add to the returns.
- It’s a way of compounding. By re-investing my dividends, I am in turn getting more shares and more dividends. This will help me acquire more shares than if i just invest my own money and aim for capital gains.
Of course there are things that I need to be cautious about:
- A high yield is not the most important factor. It’s more important that the company is stable and has a good future.
- The stock price might not grow as much as other stocks. Since dividend-paying stocks tend to be mature, there might not be a whole lot of room left for large growth.
- Stock prices tend to rise before the dividend ex-div date, and then fall afterwards. It’s usually not noticeable amid the general activity of the stock market, but it tends to be more pronounced as the dividend gets larger. (so a 30% stock dividend may really affect the price but a Php0.05 per share (with a current stock price of Phph10, for example) will probably not make any noticeable impact.
It’s a long-term approach that will only bear significant fruit after some time. Of course, companies will be depositing money in my account while I wait. 🙂
Additionally, another thing that separates this from other stock investing strategies is that it’s technically income-generating. Even in bear markets, companies still typically pay out dividends. And if you’ve been holding it for a long time and/or bought it at a low enough price, the yield may be even better than deposit products.
Overall, I’m feeling good about my investment. I’ve received just small sum so far. But I’m optimistic that given time, my capital will appreciate on it’s own through increases in the stock price and that continuous investment – along with re-investment of dividends – will someday make this comparable to a quarterly bonus or even a 13th month pay.
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