This past month, I hit a new milestone. As seen by my March Stock Purchase post, I have officially crossed the £4,000 mark in projected annual dividend income. A small reason to celebrate in these bleak times. I broke out a mini fist bump and off I went to the office… I mean the living room to get started on the days work. The commute to work is something I definitely do not miss during this lockdown! It will be interesting to see if there is a permanent paradigm shift towards working from home and online meetings once this is over. But I digress, this post is about dividends and that is what I will talk about.
If you had told me 5 years ago that I would be receiving money every month for doing absolutely nothing, I would have thought that you were crazy. I would have upped my guard with the thought you were trying to pull a fast one on me. The old adage of “If something looks too good to be true, it probably is” would have crossed my mind.
But this is exactly where I find myself today. I am expected to receive £4,000 in annual income without having to lift a finger on my part. How? Passive income, thats how?
Passive income, unlike active income, is where you receive an income which is not related to the amount of labour or effort you put in. Have a read of my article ‘
What is Passive Income – 12 Ways to Earn Passive income’ to further understand this.
Once I understood passive income, I had this paradigm shift from employee to owner. I realised that as an employee, I can only work so many hours a day and thus there is a limit on how much income I can earn. On the other hand, as a business owner, the possibilities are limitless.
But I didn’t become a business owner in the traditional sense. I didn’t open my own shop or outlet. Instead I became a business owner by buying shares in various companies listed on the stock market. And as these companies I had a partial owner stake in made profits, they would send me a proportion of profit in the form of dividends. Have a look at an example I did on Unilever to see what I mean.
I thus went about building my passive dividend income stream by buying shares in companies whenever they became attractively valued. I documented these purchases in the ‘my journey’ section of this site. I slowly went from £0 in dividend income just over 4 years ago to where I am today.
Never would I have thought when I made my first dividend purchase that I would reach this milestone so quickly. That purchase only brought in £135 in annual dividend income a year. I could have looked at this paltry amount and asked what’s the point.
But I persevered. I knew that by making many small purchases over time things would start to add up quickly. I knew the power of small amounts.
When it comes to saving and investing, even the smallest of amounts can make a difference. The biggest misconception people have is that they think they have to start with an entire Napoleon-like army. They suffer from the “not enough” mentality; namely that if they aren’t making £10,000 or £5,000 investments at a time, they will never become rich. What these people don’t realise is that entire armies are built one soldier at a time; so too is their financial arsenal.
In certain months I was only able to purchase £150 – £250 worth of shares. That is all the money I had at the time. But I kept at it. I was consistent. I regularly purchased shares every month irrespective of what the market was doing. I was fixated on growing my dividend income. And that is what you need to achieve.
Consistency Matters. Consistency is what separates you from the pack. Anyone can go to the gym 3x per week for 1 week. Very few do it for years. Anyone can write 2 blog posts per week for 1 week. Few do it for years. Anyone can spend less than they earn for 1 month. Few do it for years.
It is this consistency that will allow you to achieve great things. By being consistent in my saving and spending habits, I have been able to pour money into dividend paying shares. I was consistent in following the mantra ‘spend less than you earn and invest the difference.’ By being consistent, I was able to slowly tick off the various milestones of £1,000 , £2,500 , £3,000 and £3,500 in annual dividend income. This consistency and perseverance is how I was able to grow my dividend income from £0 a couple of years ago to over £4,000 today.
And I would go on to say that these dividends I receive are worth more than £4,000. This is because Not All Money Is Created Equal. Firstly for these £4,000 worth of dividends, I do not have to put in any effort. I do not have to fight traffic every day. I do not have to go actively work for it. It is purely passive. It comes into my bank account regardless of what I do
Secondly the £4,000 I receive is tax free. This is because it is in an ISA account (Investment & Savings account) where there is no tax on dividends or capital.
As a basic rate tax payer with National Insurance contributions, for me to earn an £4,000 after tax, I would need to earn a gross amount amount of over £5500!
The amount would be even more for a higher rate or additional rate tax payer.
The £4,000 I receive from my dividends is worth way more than the same amount I would receive at work.
This is why I preach about passive income. It puts you in a position to be in control of of your life. It reduces your stress, anxiety and fear of the future. And most importantly, it adds a second source of income. I have used passive income to create my own Universal Basic Income so to speak. And in times such as these, wouldn’t you sleep better knowing that money will be flowing into your account regardless of what you do.