How to earn a passive income every month through stock investing in 2022
Want to know how to earn a passive income every month through stock investing. Do you want to know how stock investment will work in 2022? Are you looking forward to invest in shares and stocks? Then you are on the right page. Here, in this article you will get answers to all your queries regarding stocks and stock investing.
How to make money through investing in stocks?
This is what you will learn in this article. There are two ways of making money through investing in stocks. First, you can earn money when the price of the stock in which you have invested increases. Suppose, you have bought a stock for Rs. 100, it went up Rs. 150, and when you will sell it you will make a profit of Rs.50. This is the simplest and most straightforward way of making money through stock investing.
However, there is a second method of earning money through stock investment and in this method, you do not have to sell anything. In fact, you will earn money just because you have a company’s stock, you can even get it every month provided you play it right. This second way is called ‘Dividend Investing’.
Now, you must be thinking what is dividend investing. To be precise, it is a passive income strategy that works on the basis- that you have a company’s stock and you get dividends through it. Here we are going to share three things with you.
1. What is dividend? Why do companies give dividends? Why is it giving away free money?
2. The passive income of dividend in dividend investing, what are the things that you should know to earn it?
3. Which are those stocks that you can choose to make a dividend income or a passive income?
What is dividend?
Dividend is a combination of two words- divide and end. Whenever you buy a company’s stock, essentially you are buying a small part of that company, however small it may be but you surely have a certain ownership of that company.
So when the company makes a profit, which can be at any end of a quarter or end of a year, so it has two ways to use this profit. Firstly, to reinvest this profit in to the company. It has opportunities that it can pursue. They think that if they invest more in marketing, the company will progress and grow. They think that if they make more products, company will progress. It could be anything else, they could chase another new market, new product, new opportunity, and that is usually the sign of a growth company.
If a company is very young, it is not too old, and it doesn’t have too much profit, just a little bit of it, then they usually invest this profit back into the company and that will ensure that the company’s stock price keeps increasing, and the company will keep growing.
Secondly, companies use its profit by giving dividends. For example, if the company already has this profit, and it is a huge profit since it is a big company, it is not sure how it can invest all of this money back into the company. So, it want to distribute some parts of its profit or all of it among the shareholders. ‘Divide end’- The profit which remains at the end is dividend in the form of a dividend. So, renowned companies declare dividends. The profit that they have earned, they can invest some of it back into the company, but also want to distribute some of it among their shareholders in the form of dividends.
This is how you make money through dividends. The only thing that you have to do for this is to be a shareholder of the company. You have to buy that company’s stocks and keep it with you, and if you have the stocks then you are earning money, not only from the appreciation of the stock price but for that you will have to sell the stock at some point, you are also earning through dividends.
Assume that you have a commercial property or even a residential property, which you do not use yourself. With the property, you can earn an income through real estate investing in two ways. First, is that the property’s rate in increasing so in the future if you sell it you will make some profit. But till the time that property is with you, you can rent it out which gives you rental yield and it is free money. It is basically money for just owning a property. You don’t have to sell that property or anything like that for this. In fact, in this, you have to make some expenses for maintenance, but there is no effort after buying a stock. You have just bought that stock, now the company is working and making money, and through that it will give you a dividend and that is how you will make money from it.
Now how does stock work?
Not every stock gives dividends. It is a company’s decision to give a dividend. It is possible that a company that has been giving dividends in the past, can discontinue to give it in the future and a company that has never given dividends in the past, can now start it. It is completely the choice of a company. That is why if you want to adopt a dividend strategy, you will have to pick those stocks which have been giving dividends regularly in a discipline fashion. Because, it becomes a habit of giving dividends regularly and also it becomes a habit the way it works. So, the first thing that you should look into is the history of dividend payouts of the company.
The second is the dividend yield. What does dividend yield mean? It means, how much dividend has been given out in one year as an amount of divided by current stock price of the company. How much dividend was there in one year divided by the current stock price of the company. For example, if the stock price of the company is right now Rs 100 and they had declared a dividend of Rs 10 in one year, then 10 by 100 which means 10% is the dividend yield. The dividend that the companies give is mostly in the range of 1 to 3%. If it is higher than 3 to 4%, then it is considered to be a very good dividend yield. If it is less than 1 %, then it is better to consider it to be zero only or it is so little that it doesn’t make a difference, like you have taken a stock worth Rs 100 and you are not even getting a dividend of Rs 1 in a year on it.
It is important to know and understand one thing for this. It is not necessary that if the dividend yield percentage is more then the dividend yield will also be more. Why? Because, the denominator is the current stock price. For example, Reliance share is for about Rs 2000 right now, it is actually Rs 2200 but let’s assume it to be Rs 2000 so that the calculation gets easier. If Reliance says that its dividend yield is 5% (just an example) so 5% of 2000 is Rs 100. But, another company’s stock price is Rs 500, and its dividend yield is 10%, then how much did it give in one year? The answer is Rs 50. Now, we compare these two stocks, 1 stock is giving 5% dividend yield and another stock is giving 10% dividend yield, then you will feel that the one which is giving 10% is better but no, because in one year Reliance gave Rs 100 and the other stock gave Rs 50, so Reliance gave more. It is important to convert the dividend yield into an absolute amount and then compare it, because that is what is the ultimate thing as how much money is coming in a year.
Who is a shareholder?
There is a very important metric or date for this and it is called ex-dividend date. A company needs to know who they need to distribute money to, how do they even figure it out? So, it declares a date called the ex-dividend date. Whoever would have its stocks before this date will get its dividend. For example, if is the ex-dividend date is 15th February of any year, then whoever would have this company’s stock on 14th February will get the dividend in the form of whatever dividend is declared, and that is how it works.
So, it is extremely important that you should have the ownership of that stock as of one day before the ex-dividend date. This is a very important criterion.
How to pick the dividend stocks?
Again, there are two ways- one takes a little hard work and the other one is easy.
The method that requires hard work involve thorough research. You need to invest your time in doing your own research. You can go to moneycontrol.com, tickertape.com, and such other sites, take out a list of all the stocks of big companies, because only their dividends are reliable since they make huge profits. Then, you need to sort them in the order of descending dividend yield, which will help you to decide which stocks you can buy. Then you will do research on them- how is their income growth? How is the growth of the industry? How was the dividend maintained in the past history? So on and so forth. This will take some hard work and your time, but if you do that job well and if you are inclined towards your research then you should absolutely do it with full dedication.
But if you do not want to invest your time and hard work then you can opt for the second option- which is buying a portfolio. It is one of the best ways to pick a good dividend stock. Another good thing about a portfolio is that some of the other company is always giving a dividend at some or the other time. And, that becomes a great way for you to generate this passive income. If you have 50-100 dividend stocks in your portfolio, then some or the other company would surely be declaring a dividend in a month, in a quarter, or in a year. If a company has not declared a dividend because it is going through bad times, then another company will declare more dividend, so on and so forth. So that is the power of a portfolio. When it comes to buying a portfolio, one of the best option is Smallcase.
It is a portfolio of stocks that represents an idea. It also has Smallcases based on the idea of dividends. Two of the best Smallcases are –
· Dividend Stars
· Dividend Aristocrats
When you log in on Smallcase, you can go to discover, and search for Dividend Stars. It is quite simple. It says dividend returns are very important as they are an additional income. So, this Smallcase consists of companies that have maintained an average dividend yield of at least 2% over the past 10 years. So basically, this Samllcase has worked at it and chosen all those stocks which have maintained at least 2% dividend yield over the last 10 years, which we can consider to be a good number. Moreover, it includes only the companies which have not cut dividends over the last 10 years.
Another good thing about the Smallcase is that in this, re-balance occurs only once in a year. The concept of re-balancing is very important in Smallcase because it gives you 100% control over your stocks. So, you are aware at all times, which stock is being bought or sold, and everything happens through your Demat account, so it is never out of your control. In this, re-balance happens only once a year, which helps save money as well.
Stocks & weights included
If you look at stocks and weights, then it has Bajaj Auto, CSC, Chambal Fertilizers. If you click on Bajaj Auto, then you can see a dividend yield of 3.53%, which is great, and Chambal has a dividend yield of 2.5%, which equally great. There is Infosys which shows a dividend yield of 1.74% and ITC Limited with 5.33% dividend yield. These are some of the few stocks, which are available right now.
You can start with only Rs 24,000. All you have to do is to just click on ‘invest now’, it will ask you whether you want to do a monthly SIP or one time. You can even increase it as much as you want, so let’s say you want to increase it to 75,000, click on ‘confirm amount’. And then, you will simply buy and get that in here.
It is slightly expensive because it has a minimum investment of Rs 54,000 but it is equally good. If you look at the stocks weights in this, it has Asian Paints, Bajaj Finance, Infosys, ITC, Nesco. So it has a bit more stocks.
To be frank, among these two Smallcases, you can opt for Dividend Stars because it is great.
Don’t forget that you are not forgoing your returns in this. Just because it is giving a dividend, it doesn’t mean that the stock price will not increase. The stock price of Bajaj Auto, CSC, Chambal have increased. The stock of Bajaj Auto has actually increased over a fairly long period of time. Its one-year return is 36% which means if you would have invested in this stock for a year, then you would have not only got 36% but also Rs 3.5 on every Rs 100 over and above, which is brilliant, isn’t it right? Because that is how you get the magic of not just the stock appreciation but also the dividend yield. So, why would you say no to it? And that is why its growth of 5 years is 26.65%. It has medium volatility which means it doesn’t fluctuate a lot, and it is quite stable. And the best thing is that it is free, you do not have to give any money for this Smallcase.
In general, dividend investing is a very good passive income stream. You not only get capital appreciation or stock price increase, but you also get free money for every stock ownership.
How dividend taxed?
Whenever a dividend is declared, 10% TDS is deducted. Whatever dividend amount you have got, 10% of it will go towards tax and the rest of the amount is considered as other income so it adds up to your Income Tax slab, and is deducted according to the tax slab you fit into. It is simple and straightforward. The government takes away 10% beforehand and after that, you have to give the tax according to your Income Tax slab. That is something that your CA can easily handle or any Income Tax software that you use.
To be precise, if you have lump sum money, and especially if you want to invest for your parents or even for yourself then ride on the stock appreciation but why say no to free money in the form of dividends. If this article added value to your knowledge then please like and share this article and comment below for any suggestions. If you are an investment and Business freak person then please visit the Business section of Whatsup Guru.