“That’s really what wealth does for you. It gives you freedom to make choices”– Oprah Winfrey
People often dream of a day when they would be free to pursue what they are passionate about. Some of them believe that they have a novel within us, others are keen to study music, a few others wish to go participate in chess tournaments and some aspire to become a YouTube sensation. But you need to understand that these callings are not likely to provide any stability in the short term. Until then, you have to work for money to ensure that your families have a decent standard of living.
As far as parents are concerned, they are keen that their children don’t have to live a life holding on to a dreary job just because of the salary and bonuses it offers. That’s the reason they are keen to create a steady flow of income for their children so that they can be faithful to what they want to do.
But, what if you could generate substantial income?
What if this income keeps increasing steadily every year?
What if you literally don’t need to work to get this amount credited to your bank account?
Does this sound intriguing?
While money acts as a store of value, remember that this value reduces with time because of inflation. That is, Rs. 100 that you save today will be worth less 10 years down the line as the prices of goods would have risen over this period. Therefore, it is important that the money you save at least earns inflation-beating interest.
Related read: Back to school: A guide to investing
As the old saying goes, you don’t have to work if your money does. That said, a good portfolio is not built overnight. It takes a few years to identify enough investment opportunities. One such avenue is investing in dividend aristocrat.
Stocks are among the most popular investment instruments around the world. In the US, a category of stocks called Dividend Aristocrats are especially popular. These are stocks that pay regular, robust and incremental dividends.
In India, such stocks are known as Dog stocks or Divided Yield stocks. While these may not have caught the fancy of the market yet, investing in them could be a good way of earning stable income.
To identify such stocks, you’ll need to look at something called the Dividend Payout ratio. Understand and learn to calculate by reading this beginner’s guide.
Two paths to profit: A dividend yielding stock gives you two ways to win – by selling the share when the share price goes up, and through the dividend that the company pays. You don’t have to depend only on market valuation for your investments to pay-off.
Hedge against inflation: When inflation is at 4%, a return of 8% (a rate a few fixed deposit investments provide) - which otherwise sounds quite decent – is cut down to 4% in real terms. However, dividends can help your investments potentially beat inflation by adding to your overall return.
Steady stream of income: As mentioned earlier, dividend aristocrats provide an annual payout. The steady stream of income can be a second source of income. This can free you up to actively pursue your passion instead of worrying about how to earn a little more money.
Profits and ownership: Typically, you need to sell your shares to benefit from your investments in a company. This means giving up your ownership of the company, and not participating in the future gains the company makes. With Dog stocks though, you get to make profits without giving up your right to participate in future growth.
Compound returns: Compounding is one of the most powerful ways to grow your investments. So, the dividend you earn can be invested back in the company or another return-earning investment, which can help your overall returns rise over the years.
Better performance during downturns: Investors who buy dividend yield stocks tend to trust the fundamentals of the company and hold on to their investments for a long term. This means during a downturn, when the market is bearish, these stocks are sold less than their counterparts. Therefore, they have the potential to lose less value even when the markets are in a funk. Related read: 4 ways company dividends affect share price As the old saying goes, you don’t have to work if your money does. That said, a good portfolio is not built overnight. It takes a few years to identify enough investment opportunities. One such avenue is investing in dividend aristocrat.
Tax benefit: Dividend income isn’t taxed if it doesn’t exceed Rs 10 lakh in a year. For example, if you receive a dividend income of Rs 6 lakh, then it won’t be taxed!
To sum up, dividend income can certainly offer you independence from the daily worries of having to earn a salary. All one needs to do is identify the right dog stock, invest in them when dividend yields are high and hold on to them. Over a period of time, the dividend income may be enough to sustain your livelihood. If you feel that you are at a juncture in life where it is too late to create a dividend-based portfolio, create one for your children or grandchildren.
Don’t be surprised if your rock star grand-child ends up writing a song about you that expresses gratitude!
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