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How to Get Passive Income from Dividend Stocks

Dividends are a form of payment made out to stockholders of a company. In other words, the company essentially shares a certain percentage of its profits with its stockholders. Dividends are typically paid on a quarterly basis – or at least four times a year and are an excellent way for investors (big and small) to generate a passive income from stocks.

When it comes to securing a consistent passive income from stocks, it doesn't get any better than investing in dividend stocks. You see, as a reputed and growth-centric private or public company makes profits, it funnels a calculated portion of its profits and cycles it back to the stockholders and investors in the form of dividends. Now the best part is that investors can either take the cash and do whatever they want with it or be smart and reinvest it back into the company and acquire more shares.

In simple terms, the dividend yield for a stock is the amount it pays in dividends per share every year divided by the current price of that share. It basically indicates the amount of return you'll receive every year contingent on the recent price of that stock.

Therefore, dividend yields can be highly volatile from one organization to another, and each yield can considerably increase or plummet on a year-to-year basis. This is primarily why many investors who aren't entirely sure of what dividend stocks to go for invest in companies that are hailed as 'dividend aristocrats.' This simply means investing in companies with a super impressive record of consistently paying dividends – typically for more than 25 years.

Short for trailing twelve months, TTM is annualized data that investors can proficiently use to evaluate recent or current financial data. TTM is vital as it helps eliminate the risk of seasonality and minimizes the impact of nonrepetitive inconsistencies in financial factors such as fluctuations in expenses, demand, or cash flow.

Utilizing TTM, investors and/or analysts can assess recent monthly or quarterly financial reports instead of having to go through older data that mainly contains a company's overall fiscal or annual information. However, keep in mind that using TTM charts is less effective for short-term changes and significantly useful for long-term financial forecasting.

In the US, companies typically make dividend payments on a quarterly basis. However, some companies pay dividends monthly and/or every six months. Each dividend payout is approved by the company's board of directors, after which the organization will announce the date of the next dividend, the amount, and the ex-dividend date.

The ex-dividend date is an immensely vital component for investors. It's the final date to buy and own the stocks to be eligible for the dividends on those stocks. If you purchase any stock after the ex-dividend date, you will not earn any dividends. However, investors that sell their stocks after the ex-dividend date will still be eligible for receiving dividends as they already owned the stock before the deadline.

Companies listed as dividend aristocrats in the S&P 500 index are businesses that have a significantly long history of paying dividends each year for up to 25 years or more. Here are five great examples of dividend aristocrats:

Walgreens Boots Alliance Inc (NYSE: WBA)

The biggest pharmaceutical company in the US and Europe – Walgreens Boots Alliance Inc, has been consecutively paying dividends for over 88 years and has a dividend yield of 4.03%.

Roper Technologies (NYSE: ROP)

One of the biggest technology companies in the US, Roper Technologies, has been paying dividends for 25 years and has a dividend yield of 0.50%.

Lowe's Companies (NYSE: LOW)

Lowe's Companies has been paying dividends for over 25 years. The company's dividend yield is 1.26%.

Stanley Black & Decker Inc (NYSE: SWK)

One of the world's biggest hardware and appliances manufacturers, Stanley Black & Decker, has been paying dividends for more than 54 years. The company's dividend yield is 1.7%.

Coca-Cola (NYSE:KO)

Referred as the 'king of dividends', Coca-Cola has been paying dividends for more than 25 years and has a dividend yield of 3.1%.

These are mutual funds that hold stock from different companies and pay regular dividends to investors quarterly. So, if you've invested in dividend mutual funds, the dividend payout will be made to that fund. Then, the mutual fund will then transfer payments to the investors. Moreover, dividend funds typically comprise of dividend aristocrats that have a long history of consistently paying dividends.

Some examples of dividend mutual funds:

  • The Vanguard Dividend Growth Fund (VDIGX); SEC Yield – 1.48%
  • The Federated Strategic Value Dividend Fund (SVAAX); SEC Yield – 3.21%

Passive income from stocks can truly help investors diversify their income streams and generate independent wealth. However, it's important first to measure the pros and cons of different investment opportunities and identify what works for you.

Looking for more ideas? Read our passive income guide.

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