Advantages of a Dividend Portfolio for Passive Income

By | June 17, 2015

Dividends

A Dividend Portfolio is a great way to build passive income for life. It is easy to set up and manage. The portfolio can grow in size and have favorable taxes on the dividends. Dividends can be set to automatically reinvest themselves for compounded growth. If necessary, the portfolio can be liquidated for a cash-out.

 

Dividend Portfolio Advantages

  • easy to set up
  • low maintenance
  • favorable taxes on dividends
  • reinvest dividends automatically
  • easy to liquidate funds
  • capital appreciation

 

Portfolio Set Up

A dividend portfolio is very easy to set up. Open a brokerage account and make your deposit. Do research on a number of high quality companies that have been consistently paying dividends over the years. Start your research with some popular companies like Procter & Gamble Co (NYSE: PG), The Coca-Cola Co (NYSE: KO), General Electric Company(NYSE:GE), Consolidated Edison, Inc.(NYSE:ED). Understand why these companies are very good and try to pick similar companies. Do research on these employees, especially their fundamentals, such as balance sheets and cash flow statements.

Management Time

Once a dividend portfolio is set up with all the right dividend stocks in place, there is little to manage. In general, a dividend portfolio is meant to have little maintenance going forward. Income flows in every month or quarter and the total time to manage the portfolio decreases over time. That is the whole point of building passive income for life.

Taxes

Qualified Dividends are taxed at 0% if you are under the 25% marginal tax bracket, 15% if you are at the 25% – 35% marginal tax bracket, and 20% if you are above the 35% marginal tax bracket. For most people, their qualified dividends will be taxed at 15%. Active income such earnings on W-2 will be taxed at the marginal tax bracket. Therefore, a dividend portfolio can help you make more money in the long run.

Dividend Reinvestment

Dividends can be set to automatically reinvest in the same stocks for, typically, no fees. The dividend reinvestment in the stocks produces more ownership in form of more shares of the companies. With more shares of the companies, you receive more dividends. And with more dividends, you buy more shares of the companies the next time dividends are issued. This means, over time, your returns are compounded.

Liquidation of Funds

It is relatively easy to liquidate a dividend portfolio. If necessary, all the stocks in the portfolio can be sold at market rate and have the equities transferred to cash.

Capital Appreciation

A Dividend Portfolio with the right stocks not only produces a nice income stream, but also has capital growth. Capital appreciation usually occurs in a dividend portfolio because good companies tend to grow in value as well.

Conclusion

All these advantages make a Dividend Portfolio a very smart choice for building passive income for life.

 

Assumptions
Assumptions are made based on investments in U.S.

 

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