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Consider making dividends a key factor in your financial offense.

According to Wikipedia :

Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

What does that mean? It means that if you want to generate a stream of passive income this way, you will need to become a shareholder of such a company. These are usually publicly traded companies on one of the stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ (NASDAQ).

It also means that you will need to invest in companies that generate steady and predictable profits. If their profits fluctuate too much or if they generate losses frequently, they will not be able to pay out a dependable stream of income.

Yield

One key word to understand here is yield. Yield is the total amount of money paid out in a year for each share divided by the current share price. Depending on the context of the discussion, this could mean payments made in the last 4 quarters (or 12 months) or projected to be made in the next 4 quarters (or 12 months).

Take the case of Wal-Mart Stores Inc. (WMT). Walmart is known for its steady growth in earnings and steadily increasing payouts. As of today (June 7, 2009), Yahoo! reports that Walmart has a yield of 2.1%. They are projected to pay a total of $1.09 in the next 4 quarters. Since the current share price is $51.07, the yield is ($1.09/$51.07) or 0.021 -- which is expressed as 2.1%.

How to Invest

There are two major "schools" of investing in companies that pay out a steady income:

High-yield investing: This style of investing looks at "high-yield" companies. These are companies that typically have double-digit yields (10% or more). These are sectors of the stock market that do pay out significant amounts of money as dividends, such as Business Development Companies , Master Limited Partnerships and Real Estate Investment Trusts.
Dividend-growth investing: Alternately, you could invest in a company (such as the afore-mentioned Walmart) that does not pay out a lofty yield, but has consistently growing earnings and payouts. This approach to investing is called dividend growth investing.

We will take a detailed look at these styles of investing so that we can put them to good use in our plan for financial freedom.

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