How to make passive income with dividend investing

Getting into the stock market can be intimidating. There’s a perception that buying stocks is risky, and while that’s true for some forms of investing like day trading, there is another type that allows you to build a steady and reliable passive income: dividend investing. 

What is dividend investing?

Dividend investing is when you buy dividend-paying stock from a company. Dividends are portions of a company’s earnings distributed to shareholders as a reward for investing. Unlike the day trading you see on TV where people in suits run around the stock exchange with a phone glued to their ear, dividend investing is more of a slow burn and requires less input, making it a great investment choice for building a steady and reliable passive income. 

Dividends come in two forms: regular dividends and special dividends. Regular dividends are paid regularly, usually quarterly or annually. On the other hand, special dividends are one-time payments made when a company has exceptional financial performance or asset sales. 

What are the types of dividends?

There are three types of dividends: Cash dividends, stock dividends, and property dividends. 

1. Cash dividends pay shareholders cash proportional to the shares they own. The more stock you own, the more cash you get. This is the most common type of dividend.

2. Stock dividends give shareholders additional shares instead of cash. These dividends aren’t taxed, but they can dilute the share price – the more shares there are of a company, the less money they are worth. 

3. Property dividends distribute a company’s assets, such as shares of a subsidiary. This is the least common type of dividend, but is often used to preserve cash or shareholdings, which are the number of shares in a company.

Why invest in dividend-paying stocks?

There are two main benefits to dividend-paying stocks: first, it generates a steady income; and second, it has a compounding effect.

1. Steady income. Dividend-paying stocks provide a regular income stream, especially when investing in financially stable companies. To know what stock to buy, look at companies that generate consistent earnings and pay regular dividends.

2. Compounding effect.  When you receive a payout, it’s a good idea to reinvest your earnings. This can significantly boost your returns over time, generating a compounding effect where you earn money both on your initial investment and the reinvested dividends – think of it as a way to exponentially grow your wealth.

How do you identify dividend-paying stocks in the Philippines?

To start, look for companies that have a strong track record of paying dividends. The Philippine Stock Exchange provides two great resources, both of which can be accessed through its website:

1. The PSE Quarterly Dividend Report: The local stock exchange releases a quarterly report tracking companies that declare dividends. In 2023, 137 of the 283 listed companies declared dividends, with an average yield of 3.78%. The dividend yield is the percentage of a company’s stock price that it pays out per year. Leading sectors included services (5.54%), financials (4.47%), and industrial (4.25%).  

2. PSE Dividend Yield Index: Launched in 2022, this index focuses on companies that have consistent high-yield dividends. It includes 20 companies that are selected based on liquidity and three-year average dividend yield performance., featuring blue chips (or reputable companies).

Remember, investing in dividend-paying stock won’t get you instant gratification, but it will help you make some passive income and build a strong financial foundation for the future. BPI Trade is a great entryway into investing – they have free educational webinars and materials to guide you on your investment journey. Once you have the proper knowledge, you’ll wonder why investing seemed intimidating in the first place.

Visit the BPI Trade website to get started on your investment journey today. Want more content like this? Visit the The Program for more financial education articles.