I love passive income and cash flow and have worked my butt off to ensure I have multiple streams of it in my life, and I want you to have it as well (outside of your own business). You need to be financially redundant and have MULTIPLE income streams. This is why I encourage my nurse practitioner sisters and brothers to build up their nurse practitioner niche practices, invest in income-producing real estate, and find multiple ways to become financially redundant. One way to do this is by utilizing the power of dividend paying stocks/funds!

Under the traditional model of retirement planning or producing income from stocks/bonds, the standard advice is to build a large portfolio and pull somewhere between 3 to 4 percent from it every year. This range is what financial experts call a “safe withdrawal rate” – meaning there’s a very high probability that your money will last you for the next 30 years or so.

However, what happens when the economy goes into a recession, or the stock market experiences a 20+ percent loss as we’ve already had this year? Or what if things get even worse as they did back during the housing market crash in 2008 when stock indices lost nearly half of their value? How secure would you feel about retiring if your $2 million nest egg was cut down to $1 million (or less)? (Disclaimer: in all reality it would go back up, because it always does…)

Instead of having to sell shares of stocks or funds, what if there was a way to still draw income from them without ever having to touch your principal?

There is! And this is the beauty of dividend stocks. These are companies that distribute a portion of their earnings to the shareholders (usually every quarter).

When you own enough shares of high-quality, dividend-paying companies, it really won’t matter if the stock price goes up or down. As long as that company stays committed to making those distributions, then you’ll continue to benefit without ever having to liquidate any of your shares.

What’s great about this arrangement is that it truly is passive income. For doing nothing more than owning the stock, you get paid. How easy is that?

If that’s not enough, then here’s something else that might interest you about dividend stocks: They tend to outperform non-dividend-paying companies over time.

Why is that? Because by definition, companies that pay dividends must produce strong profits. Therefore, they tend to have more robust balance sheets and make more careful strategic business decisions than those that don’t.

Additionally, dividend distributions are also taxed more favorably by the IRS. Whereas most retirement income is treated like ordinary income just the same as the money you’re earning today from your job or business, “qualified dividends” are subject to a completely different tax bracket system. This means instead of paying 24 or 38 percent of your income to taxes, your top tax bracket could be more like 15 to 20 percent! That is HUGE savings, and is just one more way to legally reduce your taxes…

So, Is it really possible to retire on dividends alone? Yes, and here’s the math.

Let’s say your income target is to produce $5,000 per month ($60,000 per year). If you could assemble a portfolio with an average dividend yield of 4 percent (totally realistic), then you’d need:

$60,000 / 0.04 = $1.5 million 

Of course, if you’re being financially redundant, then you’d have other sources to draw from as well such as your retirement plans (401ks, IRAs, etc.), rental properties, your niche practice, etc. In that case, you may only need your dividend portfolio to produce half this amount or $2,500 per month. Re-running the numbers, now you’d only need $750,000.

So, what does someone buy to build such a dividend portfolio?

First, you can buy individual stocks of companies.

At the heart of any dividend income portfolio are high-quality dividend-paying companies. If you feel comfortable screening and analyzing these companies on your own, then go for it!

A good place to start would be blue-chip companies from the Dow Jones Industrial Index. Well-known names like Verizon, Walgreens, and IBM all have yields that are well above 4 percent. However, just like any stock portfolio, you’ll want to take great care to diversify and pick companies from various sectors. Never put all your eggs in one basket!

If you’d rather not pick out your own dividend stocks, then there’s no shortage of funds that have already done this for you. The investment industry has several high dividend yield ETFs/Index Funds that have hundreds or even thousands of these companies within them. I prefer these funds over individual companies because it is so much easier to do.

Two popular examples include:

• Vanguard High Dividend Yield ETF (ticker: VYM) – Tracks the Dow Jones U.S. Dividend 100, a group of companies that have quality fundamentals and a consistent history of dividend payments.
• Schwab U.S. Dividend Equity ETF (ticker: SCHD) – Holds over 440 large-cap U.S. stocks forecast to have above-average dividend yields in the near future.

Again, don’t just buy one ETF. Spread your investment out over several of them so that you’ll reduce risk. I personally buy standard ETF/Index Funds like the ones above but also some high yield bond funds to diversify my investments and passive income streams.

Another option for those that would like to get a slightly higher return and are willing to take on more risk, then another investment you may want to try is a REIT (real estate investment trust, as discussed in THIS article). A REIT is a company that invests in a portfolio of income-producing properties. To qualify as a REIT, the company must pay out at least 90 percent of its earnings to the shareholders, which generally means higher than average distributions. 

A good example of a REIT is Realty Income Corp (ticker: O). This is a company that owns and operates over 11,400 commercial real estate properties. It currently has a dividend yield between 4.5 and 5.0 percent and pays distributions monthly.

There are some drawbacks to REITs. Their share prices tend to be more sensitive than stocks. Plus, the distributions from REITs do not qualify for the same favorable tax treatment as dividends from stocks.

No matter how you plan to generate passive income, consider the benefits that dividends can offer. Unlike a business or rental property where work is involved, dividend stocks are completely hands-off. I can’t think of a better asset to own than one that will create passive payments for decades to come. I personally have been investing A LOT of my money into quality dividend paying index funds as my plan is to be completely financial independent in the next 3-5 years, and this passive income source will be the foundation to my freedom!