There are many ways to generate passive income. ETFs, dividend stocks, or even unlisted forms are possible. Since we tend to be suckers when it comes to publicly traded opportunities, our focus today is on dividend stocks and ETFs.
Some investors sometimes make a mistake: they build passive income in a way that is a quick fix instead of prioritizing securing a steady, lifetime source of income. Let’s see what difference that can make.
Passive income: For life, not for years
When we think of generating passive income, some income investors have one thing in mind: high dividend yields, stable histories, and sustainable payout rates. There is nothing wrong with setting this priority. This can even work, especially for REITs or other specific dividend stocks. However, the focus on building a source of income for a living allows for other, perhaps more attractive avenues.
Instead of a high dividend yield, a lower dividend yield with strong growth may be a better option for passive income. For example, Warren Buffett has built a dividend yield of more than 50% with Coca-Cola through strong growth and maximum duration. This shows that a long-term approach means you don’t have to sacrifice anything. No, but it just takes time before one can reap great fruits.
When generating passive income, it is more important to appreciate quality. History and pay rate are relevant factors. But looking at the past. The company, products, stable sales and profits in the future are more crucial foundation for success. Paying attention to this is more important than mere key figures.
We must also not forget: quality sometimes has its price. If you still want passive income from a dividend stock in 30 years, sometimes you should be willing to pay for this quality. Or be patient to wait for a favorable opportunity. This also offers a long-term approach: the time to wait until patience pays off.
Create the conditions!
In the end we can say: a passive income is built with the right approach and mindset. It’s not about getting as much income as possible in the next year. Sometimes this can even be an expensive rush shot. No, but choose quality so that there is a stable long-term income base.
You should find out in detail what this means for you. Quality, company, and taking advantage of opportunities when they arise can be crucial. Other factors related to the past should sometimes play a rather minor role.
The article Build Passive Income – Remember, It Should Last a Lifetime, Not Just a Few Years, first appeared in The Motley Fool Germany.
Motley Fool Germany 2022