Why Investing In Shares Is A Good Idea If You Want To Create Passive Income
Having enough money to live off without needing to work can provide you with an incredible amount of safety, security and freedom. How do you do this? Through passive income and one of the best ways to create passive income is by investing in shares.
Shares pay dividends which build over time and provide you with passive income.
Dividends are cash payments paid to shareholders from company profits. The company is returning earnings to shareholders rather than using it for other means. The dividend yield shows how much a company pays you relative to the share price. For example if the dividend yield is 5%, for every $1,000 you have invested you will receive $50 in dividends each year.
You have the option of receiving the dividends as cash payments or re-investing them. So let’s say you invest $100 per month into a diversified exchange traded fund (ETF) that has a 5% dividend yield which is paid quarterly. After three months (for the purpose of this exercise assume no capital growth/appreciation or depreciation of the asset), you would have invested $300.
At a 5% annual dividends that’s $15, paid quarterly you will receive $3.75 and if re-invested, you now have $303.75. You continue to invest $100 per month and after six months you have $603.75 invested when the dividend is paid, your annual dividend is now $30.19 and you receive $7.55 in dividends for this quarter. You now have $611.30.
I know a $15 dividend per year isn’t going to change your life, but this is where additional contributions and the power of compounding come into play. If these dividends are re-invested they continue to earn dividends again and again.
Want to start investing and create passive income but don’t know where to start?
Download my breakdown of ETF’s across different geographical locations, asset classes and sectors.
This is general information and for educational purposes only.
