This is a follow up of our article on passive income where we discussed multiple ways to earn passive income for salaried professionals. In this article we will create an absolute simple risk free strategy which will help you build long term wealth . You don’t have to have any knowledge in stocks to start using this technique and it is guaranteed to create long term wealth. In this approach we will be using a combination of Dividend yielding stocks and Index funds to build a passive income funnel. Combining dividend investing and index investing can be a solid strategy for generating passive income with long-term growth potential. Here’s how you can structure a passive income strategy with this approach:
- Define your financial goals – Create a financial target you want to achieve.Define your financial goals and timeline.Evaluate your income, expenses, debts, and savings.Understand your spending habits and identify areas where you can cut back. This will allow you to identify the amount you can start investing every month.
- Once you have identified the amount you can set aside. You need to divide it into two parts. Allocate a portion of your portfolio (20-30%) to dividend-paying stocks. Focus on companies with a strong track record of consistent dividend payments and growth.Diversify across sectors and industries to minimize risk. You can find list of dividend paying stocks from any of the finance websites like Yahoo finance.
- Invest the remaining portion (70-80%) in broad-market index funds like S&P 500 or Total Stock Market funds. This provides exposure to hundreds of companies and automatic diversification, reducing your need for active stock selection.
- Reinvest dividends -Opt for dividend reinvestment plans (DRIPs) to automatically reinvest dividends into more shares. This enhances the compounding effect.
- Understand the tax treatment of dividends and capital gains in your country.Explore tax-advantaged accounts, such as IRAs or 401(k)s, for additional benefits.
- Periodically rebalance your portfolio to maintain your desired asset allocation. As the market fluctuates, your dividend stock and index fund allocations might deviate from your target percentages. Rebalancing ensures your risk exposure remains balanced. You can switch to dividend paying stocks in some different sector or increase the ETF percentage based on market condition.
This is a long-term strategy. Don’t expect immediate high returns. Focus on steady income generation and capital appreciation over time. Be prepared to adjust your holdings based on market conditions and your financial goals.Remember, successful passive income investing requires patience, consistent investment, and a long-term perspective. Wish you the best.
