Regular income without work is the dream of many investors. One of the few realistic opportunities for such passive income are Dividends from shares, funds and co. We explain how such a source of income can be built up effectively, how realistic it is and what you should bear in mind.
The most important in a nutshell
- Passive income is a source of income that works without active work (or only with minimal effort)
- Investing in dividends is the oldest financial strategy in the world and an ideal source of passive income
- Sufficient capital is required to generate significant income with a dividend portfolio
- We have put together some tips and tricks to help you optimize your passive income from dividends
How passive income from dividends works
Passive income is when we generate income without having to actively invest our time and energy. In the best case, this is "Do nothing and earn money at the same time".
It is therefore in contrast to active work, for example employment in a company or self-employment. Even professional traders who work with Earn money day trading or through Trade options ultimately work actively. The following applies here: work = money, and unfortunately also: no work = no money.
It goes without saying that such passive income is very attractive. Unfortunately, it is also considered very difficult to realize. Numerous more or less effective ideashow such income can be generated are now circulating on the Internet:
- Rental and leasing income from real estate holdings
- Income from licenses, rights, royalties and intellectual property (for example, books, music, photos or software that you have produced or to which you hold the rights and for which you remunerate users).
- Solar plants, wind power plants and other productive property.
- Positions and offices that require no or only minimal work and for which there is remuneration
- Automated products and business activities that customers can purchase and use without your intervention. For example, online courses and seminars created by you.
- Dividendenstarke AktienInterest from investments or the coupons on bonds are a proven source of passive income.
With all these sources, it is debatable whether the income is really completely passive. Most forms are based on active work that was only carried out for a limited period of time and subsequently generates profit for a longer period of time.
According to this concept, the statutory pension is theoretically also counted as passive income, as people work first and then receive regular payments without any active involvement.
Even with capital-based income such as Dividends can use the Exact definition difficult be:
Money always represents work (the proportion / significance of which is still disputed in economics to this day). Accordingly, the capital with which we earn dividends is ultimately also work - just performed at a different time or by different people.
In practice, the term "passive income" is therefore used very loosely. It could be defined roughly as follows:
Dividends, the best source of passive income?
Many of the ways to earn money passively are uncertain: they require luck, only work for a limited time or ultimately represent work where payment arrives with a long delay. The The only reliable sources of income that can function permanently and without active intervention are investments.
These include:
- Dividends and other profit-sharing (e.g. silent partnership in a company),
- Rental and leasing income
- Interest
- Coupons (interest that you receive by investing in bonds)
We want to generate income from Leaving real estate ownership out of the equation todayas this is too broad a field. In addition, the purchase of buildings, facilities and land is associated with high costs and is therefore less flexible.
Dividends can be earned even with small amounts. A successful Dividend portfolio you can build up piece by piece and increase it with the income you have already generated. This makes this variant the most best source of passive income!
Another advantage is that the rules for a lucrative dividend portfolio can also be applied to fixed-interest products, Short-term bonds and the like!
Applying the dividend strategy correctly
Passive income from dividends is easy to understand, but difficult to master. The basic concept is very simple: some companies distribute part of their profits, known as dividends, to their shareholders. If you own shares in such companies, you will also receive a corresponding payout.
You can specifically accumulate such securities in order to generate passive income. There are three main types of investment for this purpose:
- Dividendenstarke Aktien. The "classic" for a dividend strategy are shares in companies that offer an attractive payout. Investors who follow a dividend strategy buy these securities directly through their broker.
- Distributing ETFs and Investment Fund. These are packages of several dozen to thousands of securities. If you invest in such products, you acquire shares in all the stocks they contain. Among the large selection, you will also find offers that focus on dividend payments and offer regular distributions.
- REITs represent a special form of shares. These are real estate companies that are active in the rental, leasing and related fields. They benefit from extensive tax advantages, but in return have to distribute almost all of their profits to their investors. This can make them very attractive investments for a dividend portfolio!
Also Bonds are often found in the portfolios of investors seeking passive income. These exchange-traded loans for companies or governments are remunerated with interest (the so-called coupon). Despite the different names, the function is comparable to dividends.
Investors should note that building up a passive income considerable demands on the broker provides. You need a provider with an extensive rangeto put together the right securities, bonds, ETFs and more! Unfortunately, the product catalogs of simple app brokers can only serve as a basis, but then quickly reach their limits.
CapTrader can do that:
With over 1.2 million stocks, ETFs and other securities, 37,000 funds and access to 80 stock trading venues in 34 countries, CapTrader has all the stocks you need for your passive income portfolio!
Generating a reliable, passive income from dividends is no easy task. Especially the Selecting the right shares, ETFs and the like presents us with considerable problems:
- Distributions are by no means guaranteed. A company can stop or reduce dividend payments.
- Falling share prices can quickly wipe out a large part of our investment. Even seemingly lucrative dividends cannot compensate for such losses. We must therefore focus on companies with positive long-term prospects.
- The Dividends should increase continuously - a positive sign for the company's development and important to protect our passive income from inflation in the long term.
- A Passive income from dividends is only worthwhile over longer periods of timeas the average yield of 3 to 5 % is otherwise hardly worthwhile. Such long-term investments are particularly susceptible to crises, crashes, dividend cuts, etc. and therefore require particularly critical selection.
In order to find titles that meet these criteria, a intensive examination of the companies is necessary. This is where the Fundamental analysis which takes a close look at important key figures. The following values are particularly importantif you want to select stocks for a dividend portfolio:
Important:
Key figures for dividend shares should never be viewed in isolation! Only in combination do they provide a meaningful overall picture and show whether a security is suitable for a passive income strategy.
1. dividend yield
The Dividend yield is by far the most important key figure if you want to generate passive income through dividends. They describes what return you can expect from payouts per year and is stated as a percentage of the share price.
For example, a security with a price of € 100 and a dividend yield of 5 % would pay out € 5 per year to the owner.
This is what the Dividend yield In other words, how much passive income we receive from an investment: How much an investment pays off. However, there are a few points to bear in mind:
- The dividend yield is calculated using the formula
Dividend yield (%) = (Dividend paid/share price) × 100
determined. Both the Share price as well as the the last dividend paid are snapshots and may not reflect the actual return or risks. For example, strong price fluctuations in Aktien mit hoher Dividende strongly distort the effective dividend yield. It is therefore always advisable to get a broader picture over a longer period of time.
- A Very high dividend yield can appear very attractive at first glance, but it also represents a Important warning signal are. Companies that pay out excessive amounts (possibly even more than they make through profits!) are often in serious financial difficulties, so that an investment could lead to considerable losses.
- In some cases, in addition/instead, the Dividend as a monetary amount is indicated. However, this payout amount has only limited informative value. Only when it is linked to the share price (= dividend yield) does a really useful figure emerge. Especially in the area of Trading for beginners too much emphasis is often placed on the absolute payout amount, while savvy investors look at dividend yield, growth and the like.
- Also the Payout interval is not relevant in practice. Some companies only pay dividends once a year, while others (in the USA and Canada) pay them semi-annually or quarterly. Even shares with monthly dividends are available. However, the number of payments does not change the total return; the amount is simply divided up. More frequent payments can, however, be more attractive from the Stock market psychology be positive, as they have a motivating effect.
2. payout ratio
How much a company can pay out depends heavily on how much it earns. The The payout ratio describes the proportion of profits currently distributed to investors.
| Low payout ratio | Medium to high payout ratio | Very high payout ratio |
|---|---|---|
| Shows that the company is retaining a large proportion of its earnings. In this case, there is still plenty of potential for further dividend growth in the coming years. | A high payout ratio shows that a correspondingly large proportion of profits is already being distributed to shareholders. Further growth in payments is increasingly unlikely and increases could even come to a halt. | This is a clear warning signal, especially if it is close to or above 100 %. Significant problems could arise here. The company management may try to profit from an inevitable bankruptcy. |
3. dividend growth
The A company's dividend payout should increase continuouslyin order to secure investors an attractive, passive income in the long term. A high Growth rate is of course welcome, but what is more important is reliable growth, ideally over several years.
4. years of disbursement
Dividends are never guaranteed and suddenly missing payments can quickly reduce our passive income. Continuity is therefore the most important characteristic of a lucrative dividend share. In addition to dividend growth, this also applies to the number of years that a company has been distributing profits.
The longer reliable payouts have been made, the better. A security becomes even more attractive if the dividend also increases every year. Various milestones are used for this:
- "Dividend aristocrats" or "dividend aristocrats" are companies that pay dividends for at least 25 years without interruption and increase them every year.
- In US parlance and with some ETFs, however, the aristocrat title is awarded after 20 years.
- "Dividend kings" have achieved the feat of paying a steadily rising dividend for 50 years.
Passive income through dividend ETFs and investment funds
Equity funds and ETFs can offer an exciting alternative for investors who want to build up a passive income. They contain various securities and are available in both accumulating/retaining and distributing form.
There are two options available to us here:
| ETF | Investment Fund | |
|---|---|---|
| Function | Automatically replicate an index (e.g. DAX, S&P500, MSCI World High Dividend Yield Index ... ) | Fund managers select suitable securities to achieve the fund's objective |
| Costs | Low, generally between 0.2 and 0.6 % p.a., no front-end load | High, usually 1.5 to 3 % p.a. Issue premium on purchase, usually between 4 and 6 %, possible |
| Performance | Corresponds to the trailing index | Dependent on management |
| Advantages | - Easy to use - Inexpensive - Savings plan - Tradable intraday at any time (even like Shares for day trading suitable) Transparent | - For different market situations and strategies - Managed by professionals Returns can beat the market - Can invest broadly diversified in different markets and regions - Can survive crises better |
| Disadvantages | - Returns only as high as index Overperformance impossible - Fluctuation risk - Counterparty risk - Cover only a single market or industry - Not crisis-proof/no Hedging | - High running costs - Often very high - Issue premiums - Majority of funds deliver disappointing results - Low transparency - Counterparty risk - Only tradable with a delay |
Both forms can be useful additions to a portfolio that aims to generate passive income. Particularly attractive is the fact that with these investments the often The tedious selection of suitable dividend stocks is no longer necessary.
Instead of analyzing dozens of companies, Share trends screen, regularly adjust our own portfolio ... we can invest broadly with funds and ETFs with little effort.
How realistic is passive income from dividends?
Every investor can generate an initial passive income with just a small amount of capital. However, the amount of dividends remains manageable. Only when large amounts of capital are invested can serious additional income be generated.
Anyone pursuing a dividend strategy, therefore requires corresponding assets and must invest in a disciplined manner over a longer period of time. This approach is therefore considered rather difficult to implement.
Nevertheless, it is extremely desirable for many investors! Because a Passive income provides financial security and long-term independence. It is also less stressful than active trading, for example, and therefore a possible alternative for people who want to learn to trade.
Conclusion: Dividends are the most reliable source of passive income
Generating regular income without active work is an ideal state for most people. Unfortunately, a passive income is difficult to achieve. Among the many theoretical sources Dividends as particularly reliable.
The profit distributions of stock corporations can now be used in different ways. Direct investments into the companies can generate high dividend paymentsbut are also associated with a corresponding amount of effort: The companies must first be put through their paces!
After all, even the best dividend cannot compensate for the share price losses that threaten an economically ailing company. Especially the Dividend yield, payout ratio, dividend growth and payout years are of interest in this context.
Alternatively or additionally you can also use ETFs or investment funds, to invest in several dividend-paying companies at the same time. This makes it easier for you to choose and allows a broadly diversified investment; however, you also have to accept disadvantages such as higher costs or lower chances of outperformance.
