If you read much on the Internet about making money or investing, you have probably come across the term “passive income”. But how do you actually go about earning a passive income? Well, one of the best ways is by investing in companies that regularly pay dividends to their shareholders. There are plenty of listed companies out there who pay regular dividends from their profits. If you take a look at any index, the S&P 500 say, or the FT-SE 100, you will find companies there who pay fairly significant dividends out to their shareholders on an annual basis.
If you are wondering where the word “dividend” came from, it derives from a Latin word, “dividendum”, literally translated as something that has been divided. In old Roman times, they used to take the spoils of war and divide it out amongst the investors and merchants. Well, they do say that business is war…
Today, some companies pay out dividends while others retain their earnings, keeping their profits and re-investing them in the company.
Once those profits have been re-invested, the remainder is shared out amongst the shareholders as a dividend. The more shares you own, the higher dividend you get. In terms of when dividends are actually paid out to shareholders, it can be monthly, quarterly, every six months or every year. Then you have what are called interim dividends, which can be issued by the company at any time, in addition to the regular payments
How are dividends paid? Usually you are sent a check, which you can pay into your bank.
The nice thing about investing in a company that regularly pays out dividends is that you receive regular, predictable income with no work involved your part. So it truly is a passive income. Of course, you could always take the money you receive and re-invest it, automatically buying new shares in the company to increase your shareholding, using a process known a DRIPS (Dividend Re-Investment Plans).
Obtaining additional shares in this way saves you paying any transaction fees (which you would normally pay if you were buying shares through a broker for example) This is a great way to make the most of your investment.
You might not get the cash, but you get a bigger shareholding that , depending on the company performance, could end up being worth a lot more. Buying shares for dividend income can be a great way to invest any spare cash you have.
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