25 Apr Are stocks a passive income investment? It depends…
Investing in the stock market can be a great source of one time cash. Whether you use put and call options or simply buy low and sell high, you can make some quick cash if you are willing to take on a moderate amount of risk.
However, did you know that stocks can also be considered a passive income asset? If the stock goes up in value each year and pays out dividends, then you can make money regularly after having made just one investment.
The folks over at www.beginnersinvest.about.com have this to say about dividends:
Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both. When a portion of the profit is paid out to shareholders, the payment is known as a dividend. For many investors, “living off dividends” is the ultimate goal.
During the first part of the twentieth century, dividends were the primary reason investors purchased stock. It was literally said on Wall Street, “the purpose of a company is to pay dividends”. Today, the investor’s view is a bit more refined; it could be stated, instead, as, “the purpose of a company is to increase my wealth.” Indeed, today’s investor looks to dividends and capital gains as a source of increase. Microsoft, for example, did not pay a dividend until it had already become a $350 billion company, long after making the company’s founders and long-term shareholders multi-millionaires or billionaires.
A vast majority of dividends are paid four times a year on a quarterly basis. This means that when an investor sees that Coca-Cola pays an $0.88 dividend, he will actually receive $0.22 per share four times a year. Some companies, such as McDonald’s, pay dividends on an annual basis.
So have a look at the profile of a stock you are interested in to see if it pays profits and at what percentage. Then, invest accordingly.