Previously, I talked about building a passive stream of income with real estate. In this article, we’ll delve a little more into passive income, but instead focus on stocks.
First of all, I never recommend people buy mutual funds. Somehow, when people mention “equities”, which is a term to refer to stocks, they sweep mutual funds in there as well. Mutual funds have annual expenses you simply don’t have to pay if you own the stock directly.
Speaking of mutual funds, go check out some of the biggest ones out there. Look at what their biggest holdings are. Also check out Berkshire Hathaway. You’ll find names like Coca-Cola, IBM, Wells Fargo, and other well known businesses. Essentially, if you buy holdings in each of those companies, you will be investing just like Warren Buffett.
Of course, it’s not EXACTLY like Warren Buffett. The price you purchase a stock position can have a long term impact. Even Coca-Cola has its ups and downs. If you watch it for awhile and catch a situation where its price drops, it might be your opportunity to get in.
People like to point out that the stock market is overvalued. According to several indicators including the famous S&P 500, that is in fact true. Which is why if you invest in an index fund, you will be buying at that average, overvalued price. But if you have a short list of rock solid, dividend paying stocks, then at any given time, one of them may dip. It won’t move the big meter of the index much, but it affords you a chance to start or increase your position in that stock at a good price.
And over time, those small opportunities will start to add up as you begin to receive more dividends and dividend increases. You will begin to make more and more money from simply waking up and being alive. You don’t have to go into work and punch the clock to get paid this way. And that’s the idea.
Don’t tap the money, but instead either store it up to buy more stocks when they hit a discount, or check the DRIP option, and get paid in more stock, which leads to more dividends.
But don’t forget to do your homework. One of Warren Buffett’s strongest points was that he wouldn’t buy something he didn’t understand. He avoided technology stocks back in the 90s, and people thought he was crazy. He dodged the Dot Com Bubble, not through luck, but by sticking to his principles. When you have your eye on a certain stock, dig out financial reports. Try to understand how they make money. Figure out if they have a wide moat, a strong brand, and decades of paying dividends without any cuts.
This will eventually help you build another stream of income.