How do you earn passive income by investing in stocks? Here are the steps. The method is not difficult and can be done by anyone, including beginners. Shares are proof of a person’s ownership of a company. As a means of investment, stocks can provide passive income. Here are the ways and steps to generate passive income from stocks:
1. Focus on dividends
There are two main sources of profit from stock investing, namely:
- Increase in stock price (capital gains). The stock price changes at any time, and investors who buy can benefit from the increase in the stock price compared to the purchase price.
- Payment of dividends. The company can pay cash dividends to shareholders. Since our goal is passive income, the focus of stock earnings is on dividends.
First, as long as the company’s performance is good and not affected by fluctuations in the stock exchange price, dividends will be distributed. Dividends are equity profit sharing. Paid after the approval of the GMS. Therefore, no matter how the stock price performance in the market is, it will not affect the company’s dividend distribution. Dividends are determined by the performance of the company.
Second, tax exemption. The Indonesian government recently issued a policy of exempting dividends from tax if a number of conditions are met. Because the conditions are relatively loose, I assume that most investments with dividends will enjoy tax-free dividends, and the canceled dividend tax is 10%. That’s not a small amount, especially if it’s added from year to year.
Third, the effect of compounding dividends. The key to successful investing is the occurrence of compounding interest known as “interest”. The amount of investment in the following year is not only the principal of the first investment, but also the compound interest of the principal of the investment and the interest on investment. The effect of compound interest is that the increase in the value of an investment follows an exponential, rather than linear curve. The return on investment increases dramatically over time. Many financial experts, including Warren Buffett, say that it is this compound effect that makes people profit from their investments. The more shares you have, the greater the dividends you receive, etc.
Fourth, stock yields are very attractive. BBRI can offer yields of up to 50% p.a. compared to 19% p.a. for PTBA. Yield is the return on dividends given to shareholders. The higher the better, and vice versa. The minimum reference interest rate is the same as the interest on bank deposits. Of course, the value of this yield will depend on the performance of the stock price. The higher the stock price, the lower the yield for the same value of the stock dividend. and vice versa. High dividend yields are an important capital for us to live and work calmly and satisfied with dividends. The higher the yield, the safer and more sustainable it is to rely on dividends as a source of retirement income.
2. Choose stocks that pay regular dividends
We should be able to pick stocks that pay dividends consistently over time. If you don’t pay this year, you won’t pay dividends next year. Consistency of dividend payments is important because we want to use dividends as a source of passive income. The good news is that it’s relatively easy to see which companies are diligently paying dividends. Just check the dividend distribution data on the Indonesia Stock Exchange website. To be able to assess whether this stock is good at paying dividends, we need to look at two metrics, namely:
- dividend yield
- Payment of dividends.
3. Focus on stocks with high dividend yield and payout ratio
Dividend yield and payout ratio are important metrics for assessing stocks based on their payout ratios, which are also important in determining how investing in stocks can generate passive income. Dividend Yield refers to the ratio of the amount of cash dividends a shareholder receives to the purchase price of a share. The higher the yield, the better, and vice versa. Simply put, dividend yield is like deposit interest. The percentage of interest earned on savings.
Formula: Dividend/Share Purchase Price
The dividend payout shows the percentage of the company’s profits distributed to shareholders as dividends. The greater the payout, the greater the dividend received by shareholders, and vice versa. This ratio is used to predict the amount of dividends to be distributed based on the company’s estimated profits.
Formula: Dividend/Net Profit
4. Analysis of the fundamental performance of the company
The important thing is that we can choose the right stock. Not only do we make sure that stocks pay dividends, but they continue to pay. Paying dividends consistently is not easy. To do this, we need to evaluate the fundamentals of the company. Companies with good performance and fundamentals tend to be able to pay dividends and do so consistently. Because the ability to pay dividends depends largely on the financial health of the company. This is the main determining factor. For reference, the exchange provides a list of stocks with a good track record of paying dividends, namely: IDX High Dividend 20. The index measures the price performance of 20 stocks that have paid cash dividends with a high payout ratio over the past 3 years. dividend yield.
5. Distinguishing between value stock and growth stock
Types of stock classification may vary. One of them is value versus growth, which is important for us to understand if we want to get passive income from stocks.
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Stock Value
Value Stock is a stock of an established company that has been in business for a long time and has a solid market share. The company’s financial performance in general is very good and stable.
This type of company is usually no longer growing rapidly. The market share is stuck! An example of a well-known value stock is Coca-Cola. Who does not know this brand of drink, the name has gone global. However, their growth is no longer fantastic simply because their market share is already large.
The advantage of the value of shares is that the company pays dividends diligently to shareholders. The company is already profitable, so they can share the profits. The downside of value stocks is that stock prices are relatively immune to large gains, as profits tend to be smaller. Due to the pursuit of growth, the company’s financial performance
Growth Stock
It usually results in small profits or even long-term losses. More of the company’s funds are reinvested in pursuit of growth and business opportunities. Growth stocks Growth stocks are stocks of relatively new companies that have entered new industries and have a relatively small market share.
Therefore, the company can grow very quickly. The advantage of growth stocks is that due to the company’s large growth potential and market share potential, the relative increase in stock prices is relatively large. The downside of growth stocks is that companies generally do not pay dividends to shareholders. The company is still losing money and therefore cannot provide profits to shareholders. In both classifications, we choose which stocks we want to make a source of passive income.
7. Portfolio diversification
You Even if a stock has a good track record of paying dividends, there is no guarantee that it will continue to pay dividends in the future. Dividends paid to shareholders are the result of profits. And the company’s profits are uncertain. Therefore, we must diversify stocks, that is, spread our investments among several stocks in the portfolio, not just focus on specific stocks. The goal is that if one share does not pay dividends, there are other shares.
8. Understand how stock dividends are distributed
We need to understand the technical issues of dividend distribution of shares. This is an important part because many people do not understand the process of distributing dividends.
- Dividends are distributed at the discretion of the GMS. Each share will be entitled to the amount of cash dividends in accordance with the general meeting of shareholders.
- Shareholders registered before a certain date are entitled to dividends commonly referred to as dividend dates. After the dividend date has passed, shareholders will not have the right to distribute dividends, which is commonly referred to as the ex-dividend date.
- The Company will pay cash dividends to the shareholders’ RDN account on the specified date, as recorded in the shareholders’ register. RDN is an investor’s account with a stockbroking company. As long as the dividend is reinvested in Indonesia, the government will not tax the dividend.
9. Dividend opportunities for overseas exchanges
The opportunity to earn income from dividends is not only in the Indonesian stock market, but also in foreign stock markets. In fact, overseas stock markets offer many opportunities to make a living on dividend income. In the U.S. market, it is called the Noble Dividend. Here’s a list of stocks that have paid cash dividends over the past 25 years and whose dividend payments continue to rise. Investors who want to buy noble dividends don’t have to worry about having to pay huge fees. Because there are many ETFs available now consisting of aristocratic dividend stocks. Investors are automatically exposed to Aristocrat Dividend stocks simply by buying ETFs in the stock market.
10. Participate in dividend reinvestment plans
One of the strategies recommended by many experts is to buy back stocks through dividend payments. Known as a “dividend reinvestment plan.” The purpose of the Dividend Reinvestment Plan is to grow your investment on a compound basis. The Dividend Reinvestment Plan can be done in the following ways:
- Overseas markets. There is an option to automatically ask the broker to buy shares when dividends are paid.
- Indonesian Market. There is currently no “dividend reinvestment plan” option, so investors have to do it themselves manually.
Several studies have shown that the Dividend Reinvestment Plan provides an impressive return on long-term investment. The returns are much greater than investments without a Dividend Reinvestment Plan.
Conclusion
Generating passive income from stocks can be done once and everyone can do it. The trick is to rely on income paid in the form of dividends. In addition, the government is now exempting dividends from taxation. This makes for an even greater opportunity to earn passive income from stock dividends. Hope it’s very helpful!
