How to Make a Passive Income from Dividend Stocks

Financial Freedom

Part 1

When it comes to dividend stocks the ultimate goal is to eventually live entirely off of the dividends that you collect. So, the very first thing that you should do before you buy any stock is decide how much money you need to live off every month.
Do you need $4,000 of dividends coming through? $10,000? If you prefer a more luxurious lifestyle maybe $20,000 or $30,000. Then you’ve got a goal & something to work towards.
This is what Financial Freedom is. Not having to work & live entirely off of your investments. But to get there we have to do the hard work. That’s saving money, finding the right dividend stocks & building up a portfolio.
The very first question that you might ask is How do I buy a dividend stock? This is very easy. You need to sign up with a broker. Then you can buy some stocks & build your portfolio. There are thousands of dividend stocks to choose from. How do we go about picking the ones that will perform well & pay a strong dividend over the long term?

If you’re not getting paid a high enough dividend it’s probably not worth having it in your portfolio.

In the Coca-Cola company, they pay a $1.94 dividend per share & current market price is $60.24.
The Dividend Yield = $1.94 / $60.24 = 3.22%
Now the average dividend yield in the USA is sitting at 1.34%. So, you want something higher than the average when picking out a stock.

Dividend yield may be great, but they may be paying out all of their earnings as dividends & leaving none left in the business.
You see what happens is a business earns money. That’s what it’s supposed to do. With these earnings, they can either choose to reinvest it in the business or pay it out as earnings.
If they pay 30% as dividends & leave 70% in the business then the payout ratio will be 30%.

In Mcdonald’s company, they pay a $6.68 dividend per share & their EPS is $11.56.
Dividend Payout Ratio = $$6.68 / $11.56 = 58%, as you can see McDonald’s pays around 58% of their income to the shareholders. They reinvest 42% of their profit in the business.

You can simply find out dividend history by typing the company you are going to look for, for example, Coca-Cola dividend history macro trends.
As you can see for the last 30 years Coca-Cola company have paid dividends & they have consistently increased their dividend payouts. It’s a very good metric to look for before you buy some dividend stock.