Passive Income Dividend Investing

There are several ways to earn passive income. In my opinion, out of all the methods that I have ventured into to earn passive income, dividend investing has by far been the easiest way. I just could not emphasize this enough.

You own a bond for its coupons and a stock for its dividends. I am not talking about trading, I am talking about owning stocks. One owns stocks to collect dividends.

Passive income dividend investing can be made as easy as possible or as difficult as possible. Everything depends on how you choose to go about it.



Investment Portfolio

Historically, my investments have fallen into three buckets.

  • Retirement Stock / Bond Investments – I have been sharing on how my Rollover IRA has been performing. You can learn about my asset allocation and my 2016 retirement account performance.
  • After tax Stock Investments – I used to own (long positions) and swing trade individual stocks. However, I moved into passively managed ETFs a few years back. More on this on a separate post.
  • After tax Dividend stock investments – I will focus on earning passive income through dividend investing in this post.


Dividend Investing

Several years back, I started investing in my own hand picked portfolio of high quality dividend stocks (~10 stocks in my portfolio). The goals for my dividend portfolio were, capital preservation, income, and growth – in that order. My expectation was that my portfolio would not lose value overall – capital preservation. Honestly, who invests to lose money? Capital preservation was my #1 priority followed by dividend income from the stock, and of course,  stock appreciating in value would be a nice perk and added bonus.

In addition, my goal was to receive dividend yields much higher than what a S&P 500 index ETF or a DJIA index ETF would offer. Otherwise, why am I building my own dividend portfolio?

I set aside a big chunk of money and I started dollar cost averaging into each stock. I focused on stocks that had demonstrated solid dividend growth and lower beta (measure of volatility in comparison to the market).



Cap Weighted or Equal Weighted

Typically, dividend portfolios are equal weighted – it means if you have $10K, and your dividend portfolio consists of 10 stocks, then you would invest $1000 on each stock. Thus stocks are equal weighted in your portfolio.

Cap weighted means the stock with the highest market capitalization (number of outstanding shares * stock price) would be most presented in your portfolio and the stock with the lowest market capitalization would be the least represented in your portfolio. A dividend portfolio is typically not cap weighted. I just use the opportunity to explain the terms.

I didn’t follow either approach. Stocks that had higher dividend yields and lower beta (lower volatility compared to the market) were more represented in my portfolio.


Dividend Portfolio Performance

Some of the stocks in my dividend portfolio soared – for example, General Mills. I had made a rule for myself – “Take Quick Profits Quickly.”

If one of my dividend earning stocks went up by more than 10% within a year, then I would sell off a part of my holdings to take profits.

This was working pretty well. I was earning a good chunk in dividends and I was also taking profits.  I thought I was pretty well diversified across all the sectors.

All was well, and then, suddenly, Oil Crashed!


With the oil crash, my position in ConocoPhillips  tanked. I expected that to happen. No surprise there.

ConocoPhillips kept promising that they were not going to slash their dividends despite the fact that they were not earning money. Their EPS was in negative territory.

They were selling assets and / or borrowing to pay the dividends.

I should have seen the writing on the wall but I held on given that dividends kept coming. Finally, they reduced their dividend and the stock took another fall.


At this point, I implemented my first sell low and buy low strategy – I exited ConocoPhillips with a significant loss, and bought into a Vanguard Total Market Index (VT) which had also fallen some due to the oil collapse.

All of this would still have been fine – what really got me was Canadian banks were hit by the oil crash as well. I had large positions in Bank of Nova Scotia (BNS) and TD Bank (TD). I was down by ~20% on these positions.

I thought I was diversified. I was wrong! I thought these banks were global and were part of the finance sector and thus would be insulated from other sectors, in this case, oil. I did not see this one coming – Canadian banks hit by oil. 

Overall, my dividend portfolio was net negative by ~25%.

Basically, I had failed on my #1 priority – capital preservation.


I had enough sense to hold on to my positions in the two Canadian banks. Dividends kept coming and they recovered as oil recovered.

It was an eye sore to look at my dividend portfolio. It was deep in the red due to oil crash, however, S&P 500 and DOW had recovered quickly.

This was a wake up call. I decided to be patient, do some learning, while I let my dividend portfolio to heal itself.

It finally did and I have sold every single individual stock other than ConocoPhillips for a modest gain.


Dividend Investing Lessons Learned

What was meant to be a passive income stream didn’t turn out to be passive at all. I was constantly reading and keeping myself up to date on 10Q and 10K statements, annual reports, and anything Wall Street had to offer on each of the stock holdings in my dividend portfolio.

What was meant to be a little to no effort turned into a full time fund manager position without the salary.

Every time, I received dividends, I had to spend time and energy to figure out which company I should invest it into.

I could always be blind sighted by something like an oil crash that would affect other sectors as well.

What was meant to be a low maintenance easy passive income stream turned into a high maintenance job, anxiety, a punch in the gut, and tested my nerve every single day.

Even the most solid companies may cut their dividends which would result in the stock tanking further. You may need to weed out the bad apples (stocks) from your dividend portfolio. It is called portfolio turnover.

I had to hold myself back from selling and taking a loss every single day. It toughened me! I needed to rely on my logical analysis and hold my emotions at bay.  There was nothing wrong with the banks. 

In the end, my capital was preserved. However, it is still a loss – I could have invested in something else that provided a better return.


Passive Income Dividend Investing

I am not going to say that creating your own dividend portfolio is a wrong approach. However, I will say that it did not work for me and it did not help me achieve the goals I had identified – capital preservation, income, and growth over a ~5-7 year period.

The worst part – it was not passive at all, period!

I am so glad that oil crashed and I learned my lesson.

What’s the saying? You don’t need to explain success, but you have to explain your failure.

I didn’t bother to evaluate what went well, however, when oil crashed, and my dividend portfolio crashed along with it, I stopped to pause and ponder. I wondered, is there a better way?

How can I achieve my goals and truly achieve passive income through investing in dividend stocks without all the above pains? I will write about what I experimented with in my next post. Stay tuned! 



Do you earn passive dividend income from stocks? Is your dividend portfolio comprised of individual stocks?






Tags : ,

18 thoughts on “Passive Income Dividend Investing”

  1. For my 2016 IRA Contribution, I bought the Vanguard Dividend Yield Fund. I love dividend stocks, but given the price levels, I’m not too keen to throw loads and loads of cash at it.

    Going forward, I want to make dividend stocks a bigger part of my portfolio. Thanks for sharing and have a good one.

    1. Hi Erik,

      That’s great. Yes, I agree. Stocks are overvalued at this point, and market is at its peak. Besides my automatic contributions to my retirement account, I am keeping cash on the sidelines for now. Best time to purchase dividend funds or ETFs is during dips or market corrections – it is not timing the market – but it is a simple form of value averaging.


  2. Really interesting. And I’m intrigued to read your next post. I am currently all in on VTSAX. The idea of dividend investing sounds good to me, in that it would be great to be able to have money coming in without having to worry about selling off stock. At the same time, I didn’t want to take the time to research and manage an individualized portfolio. It also seemed like stocks would grow faster (and be taxed less during my earning years) if the dividends were lower, although I haven’t really done the research to confirm or deny this at this point. Really interested in reading what you’ve found.

    1. Welcome back, Matt! Yes, dividends are by far the easiest way to earn money passively. I had to learn that lesson the hard way – managing a portfolio of dividend stocks is doable, but from my perspective, it is not a passive effort. There is so much work to do.

      VTSAX is a great choice. Have you looked into value ETFs? You might want to look into my simple Rollover IRA portfolio / performance. It has done well.

      Sure, that is my next post 🙂


  3. I have a mixture of passive index funds and stocks that pay me dividends. I DRIP both of them and get more shares. I feel like I picked some solid companies and none of them look like they’re going to cut their dividend anytime soon. So I just let it ride 🙂

    1. Passive index funds are a great way to go MSM. With individual stocks, the downside risk is in terms of capital preservation and potential dividend haircuts – both are a possibility. No one saw the oil crash coming. ConocoPhillips is an excellent company and the oil crash took it down. So, the company may be fine, but external factors could impact the stock price and the dividend 🙂


  4. I got my start investing with dividend stocks, so it’s hard to go just to index funds. I put most of the dividends to automatically reinvest once I pick a good stock, and only occasionally sell. So while I do review the 10-ks annually or when big changes like mergers come along, I mostly let my bets ride like MSM.

    And, for the most part, it’s paid off.

    (and I think the oil stocks will rebound eventually. In the meantime, I’m telling myself I bought low.)

    1. Yes, I understand Emily. It is not easy, and I needed to push myself out of my comfort zone to do it. On my after tax accounts, I used to be 100% on individual stocks. However, after my experience on dividend investing and the amount of time it was taking away from me, I decided to switch and it was one of the best decisions I have ever made.


    1. Thank you, Laurie! The market is at an all time high. You might want to wait for a market correction or pull back to get into dividend investing. While I don’t recommend timing the market, I also don’t think entering the market when it is at an all time high is good.

      I will share on what works for me in my next post 🙂


  5. This definitely morphed as I read! Haha. Love it, though. I don’t know if I have the time/patience to do dividend investing. I like my index funds, but lately I’ve been wondering about that even as there’s so many companies I’d like to boycott at the present moment, and even more that I’d like to support. Figuring out how to do that in a profitable way without losing my life to it, though…

    1. Indexing on a S&P 500 and / or other indices that have long history of solid returns is definitely a good way to invest. If you have your asset allocation done properly, then you don’t need to periodically re-balance your portfolio. My Rollover IRA is based on ETFs that track market indices and I have very happy with the performance results thus far.

      There is an easier way to invest in dividend stocks that I will be writing in my next post 🙂


  6. We’ve been relying on dividends to account for a portion of our income stream but we’re not heavily weighted towards dividends. For people who don’t understand them well (including me) the subject is a little daunting. I’m looking forward to the details you share in your next post.

    1. It is a mammoth effort to manage a portfolio of individual dividend stocks. Got it. That is a lesson I learned the hard way – It is one thing where this statement would hold true 100% – “It is better to be lucky than right 🙂 “. In my case, it was lesson of blessing to completely divest out of that approach. I have been experimenting with an approach which has been pretty good so far and I ‘m looking forward to writing my next post about it. Wow, looks like got a lot of folks interested. Now, I am feeling nervous!


  7. Dividend income is the ultimate form of income, so I’m all for building up that stream of income. I have slowly started to do so mainly through my work’s ESPP, but I imagine I’ll be more focused on dividend income ten to twenty years down the road.

    1. The sooner you get into dividend investing, the better it is- meaning the cost basis will be lower and yields will be much higher at the time of retirement. ESPP is a great choice, you are doing the right thing by taking advantage of it. However, as a general rule of thumb, this is something to consider – it is better to not have a single stock be more than 5% of your portfolio asset allocation.


  8. Reading this in 2018 so I’m a little bit late. I started a DRIP portfolio of about three stocks years ago but had to liquidate my account because life happened. Then in 2016, I got back into dividend growth investing and started a block to track my progress. It’s only been a short time, but I think it’s one of the best decisions I’ve made. I currently have a portfolio of 16 stocks and just added 2 more. I’ll probably end up with no more than 25 and just manage those for the next couple of decades.

    Because I started late, I don’t think I’ll be earning enough in dividends to completely cover my expenses, but it should be a nice supplemental income when I retire (hopefully in about 16 years). It would be scary anyway to only rely on my dividend portfolio for my retirement, so I also have a separate Roth 401k and Roth IRA that invest in more broadly diversified funds. I also have a house and plan on getting more over the next 16 years. But of all these various ways to make money, having my dividend portfolio is the one I pay more attention to, not because it is hard or not passive, but because it is fun and profitable.

    I’m sorry it didn’t work out for you though, but I enjoyed reading the article.

  9. Hey Michael,

    It great to be reading your post again. It’s always the best efforts you have put into your content, that’s why it will help many out there looking to learn.

    By the way, Thanks for the great read Michael.

    ~ Donna

Comments are closed.