How do dividend stocks work?

A dividend is when you own a stock and receive a cash payment from the company your own for your share of the profit. Many people like to buy stock in companies that pay strong dividends to get these free payments (which are usually made quarterly).‎

I don’t personally buy specific dividend stocks. Instead, I buy ALL the dividend stocks (and non-dividend stocks) inside of an index fund! For example, when you buy a total US stock market index fund, like VTSAX, you own stock in ALL the companies in the US. And you collect the dividends from ALL of those companies. ‎

At the moment, the total US economy is paying out about 2% per year in dividends. So if you own $1M worth of stock, you get about about $20,000/year in dividends for free, without selling a share!‎

Some people ask how logistically live off my investments. Dividends is part of it! Basically my monthly spending comes from any real estate income I have, then from these dividends in my taxable accounts, then from selling shares in my taxable accounts. The “safe withdrawal” rate is 4%, so broad strokes, you get 2% of that in dividends and sell another 2% of your shares, and leave the other 98% to grow for next year! It’s like harvesting the eggs without slaughtering the golden goose.‎

Once you grow your portfolio to 25X your annual spending, you too can live off your investments forever! :)‎

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.‎


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