Love Passive Income? Here’s an Easy Way to Earn More

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The right investments could put a lot of extra money in your pocket. Read on to learn more. [[{“value”:”

If you like the idea of earning money without having to lift a finger, then you’re in good company. There’s a reason so many people like to set themselves up with passive income — it’s easier than grinding away at a side hustle.

The good news is that choosing the right investments for your brokerage account could be your ticket to a lucrative passive income stream. And there’s one investment that could be an even more rewarding bet.

It pays to own dividend stocks

Not all stocks pay dividends. Those that do are effectively taking a share of their profits and giving some of that money back to the people who invest in them. But what makes dividend stocks so great is that they offer multiple opportunities to make money passively.

First, stock values tend to rise over time with quality investments. You could put $10,000 into a given company, only to see those shares grow to be worth $200,000 over many years.

Second, dividend stocks tend to pay dividends on a quarterly basis, which gives you access to a fairly predictable stream of income. This isn’t to say that companies can’t stop paying dividends — they certainly have the right to. But companies with a long history of both paying dividends and increasing them over time are less likely to suddenly stop paying.

And if you really want to put your dividend income to work, you can sign up for an automatic reinvestment plan. Once you enroll, as dividend payments hit your account, that money will be automatically reinvested in shares of the company that made those payments. And from there, you have the potential to collect — wait for it — even more dividends.

Of course, you don’t have to set up an automatic dividend reinvestment plan. You could always take that cash and spend it, or actively invest it yourself. But putting the process on autopilot could make your life easier, thereby constituting a true source of passive income where you don’t have to do a thing.

A word of caution

Owning dividend stocks is a great way to continuously generate passive income. And there are many quality businesses that pay dividends to shareholders.

But you don’t want to buy shares of a given stock only for the dividend payments. Your first priority should be to find quality businesses to add to your portfolio whose shares are likely to gain value over time. The dividend aspect should be secondary.

Dividend payments are not necessarily an indication that a company is doing well financially. They simply mean that a company is choosing to share the wealth with stockholders rather than reinvest all of its profits in the business itself. And some companies fail investors by sharing too much of the wealth to the detriment of growing the business.

So while it’s a good idea to load up on dividend stocks, it’s even more important to make sure you’re putting your money into companies with the potential to succeed. But from there, you have the potential to earn steady passive income if you reinvest your dividends rather than take the cash and run.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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