Building Passive Income with Dividend Growth Stocks

Dividend growth stocks offer a great deal of upside for long term investors. There are very few investments that can offer the type of long term, compounding growth as dividend paying stocks. Unlike non dividend paying equities, which rely solely on capital appreciation (an increase in the share price) for returns, dividend paying equities offer the potential for an increase in share price with the added benefit of passive growth of ownership stake (through DRIP investing) or passive dividend income.

Although many investors see dividend stocks as boring, there is absolutely nothing boring about the long term historical returns that can be achieved by wisely choosing a dividend stock portfolio. For more information on why we at compounding returns favor dividend stocks, read Dividend Growth Stocks for the Long Term.

One of the most important but rarely discussed long term benefits of dividend investing is the ability to tap the consistent stream of quarterly dividend payouts to eventually help with day to day expenses. This ability to create passive long term income is one of the greatest benefits of dividend investing. It is no surprise that dividend paying, consistent growth companies have long been known as "widow and orphan stocks", because in the past, dividend income was often used as a source of passive income for families following the death of their primary breadwinner.

If you dream of early retirement, a source of passive income for your family, or even just an eventual source of income beyond your day job, dividend growth stocks may be one way to diversify your investment portfolio and income streams.

Step 1: Choosing a Dividend Growth Stock

You can't build a portfolio of dividend growth stocks without doing your homework. This is particularly important since you will plan to hold each dividend growth stock for the long term, allowing the slowly and consistently increasing dividend payout to build your portfolio into a legitimate source of passive dividend income. 

Some things to think about when considering a dividend growth stock include: 

• The industry's long term prospects. 
• The company's long term prospects. 
• The company's economic moat. 
• The company's susceptibility to legislation or external factors.
• The company's management. 
• The company's financials. 
• Health of dividend payout.
• Historical growth of dividend payout.

For more information on how to evaluate dividend stocks for long term growth prospects and the health of their dividend, visit Dividend Stock Investing Strategy: How to Choose the Best Dividend Stocks.

Step 2: Building Your Portfolio of Stocks

Finding just one excellent dividend growth stock isn't enough if you are seeking a dividend income portfolio. In fact, in order to successfully use dividend growth investing to create passive income, you must find a number of solid, dividend paying companies with good long term growth prospects and a history of increasing dividend payouts over time.

So, how many stocks should you own within your dividend growth portfolio? The answer is simple. You should own as many stocks as you can actively track and manage. Purchasing shares of stock requires research. Owning stock requires additional research. Consider yourself to be what you are, an owner of a major corporation, and put in as much work and research as you believe would be appropriate.

Step 3: Building Your Net Worth with Dollar Cost Averaging

Building your net worth is easy when you dollar cost average into your stock positions. Sites like ING Direct offer a great way to dollar cost average into your investment accounts by scheduling investments on a weekly, monthly, or annual basis.

Dollar cost averaging is a great way to ensure that you continue investing despite the ups and downs of the market. Scheduling recurring transfers keeps you from attempting to time the market, and although it can result in purchasing shares in both rising and falling markets, dollar cost averaging is a widely accepted method of preventing putting all of your money into stocks at precisely the wrong time.

Dollar cost averaging into each position results in purchasing more shares when stock prices are low, and less when prices are high, dampening out some market volatility, and helping you build your net worth gradually over time. 

Step 4: DRIP Your Way to Wealth with Dividend Reinvestment

Dividend Reinvestment Plans or DRIPs are one of the best techniques for small investors to build real wealth over time. DRIP plans allow you to purchase stock in a company and elect to reinvest the dividends in more shares of stock. DRIP plans offer an the amazing ability to not only compound your returns, but also to compound your dividends. Each time a dividend payout is issued, a fraction of a share of stock is added to your portfolio, resulting in a greater dividend payout during the following quarter. This continues indefinitely, and can result in huge returns. In fact, according to Dr. Jeremy Siegel in Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies, over 40% of the returns of the S&P 500 over the last 200 years have been attributed to reinvested dividends.

It is therefore extremely important to reinvest dividends regularly within a no cost DRIP investing program until you need the dividends as a source of passive income. Dividend reinvestment is a one way to turbo-charge your investment returns and make sure your passive income streams will meet your needs in the future.

Step 5: Tapping Your Passive Income for Expenses

When is the right time to tap your dividends and stop utilizing the DRIP option within your investment portfolio? Only time will tell. When life presents a situation where passive income from your investment portfolio is required, then the time is right to tap that source. Remember, that's why you invested in dividend growth stocks in the first place. 

The amazing thing about investing in dividend growth stocks for passive income is that provided enough time, your passive income from dividend growth investing can provide enough income to sustain some of your families needs without requiring you to sell any shares of stock.

If you can live off of your dividend stream alone, the price of your shares of stock will often continue to appreciate, even after you tap your stream of dividends to pay expenses. This means that your net worth will continue to increase, even while you pay yourself a salary of dividend income which increases every year as the companies in your portfolio increase their dividend payouts. 

Are you a long term dividend growth investor? When do you plan to tap your stream of passive income?

For more dividend investing and passive income strategies, visit the Totally Money Blog Carnival. 

Photo By: Flickr

Turn Your IPhone into a Financial Toolbox

Modern technology has changed everything. Just a few years ago, no one would have believed the advances in communication technology that are so prevalent in the modern era. Modern mobile devices enable you to video chat with your family, check your email on the go, and even watch streaming video. But these are just a few of the things an IPhone can enable you to do on the go. Nowadays, you can even turn your phone into a mobile command center for your finances, where you can track your budget, pay bills, and even invest.

Our readers are no doubt familiar with the importance compounding returns places on automating as much of our financial lives as possible. For more information and some excellent ways to become involved in the internet banking revolution, visit our post Easy Money: Ways to Automate your Finances. If you are looking for ways to further automate your financial life, you can consider turning your IPhone into a financial toolbox by downloading some of the applications listed below.

Some of the applications that are available to IPhone users can cost several dollars, while others are available for free download. Of the numerous free applications you can choose from, here are some of our favorites. 

PayPal: If you are a PayPal user, you'll definitely want to download the free PayPal App available through ITunes. The App lets you pay and get paid securely while on the go through your IPhone or mobile device.

Mint: Our frequent readers know that we love Mint.com both for building your first budget and tracking expenses over time. The Mint App for IPhone is a great way to keep yourself honest and stick to your budget while on the go. 

GasBuddy: In the era of $5.00 a gallon gas, saving at the pump is one of the biggest favors you can do for yourself and your wallet. If you've found a lump in your throat watching the cost rise during your last few fill ups, this App that tracks local gas prices could be just the thing to save you a few dollars at the gas pump. 

Groupon: If you use Groupon, the Groupon App makes your favorite money saving site as portable as your IPhone. If you aren't yet a Groupon participant, check out www.groupon.com  to save up to 90% on events, restaurants and entertainment in your local area. 

Kayak: If you haven't heard of Kayak, you may have been missing out on some great deals on travel. Kayak is a search engine for discount travel sites, that can help you discover great deals on travel. Kayak now offers both the convenience of a one stop search engine for cheap travel and the convenience of IPhone functionality.

Morningstar: The Morningstar financial application for IPhone allows you to search almost 8,000 mutual funds and ETFs, providing you with top holdings, performance, expenses, and management details.

ETrade: The mobile App for ETrade allows you to monitor your positions, make trades, and facilitates the buying and selling of stock. Although there are a number of trading Apps available, the usability of ETrade makes it our top pick.

Fidelity: The Fidelity App offers excellent usability for investors, as well as a diversified source of information. Fidelity's IPhone application provides data feed from sites like CNN, MarketWatch, Reuters, and the Street. 

At compounding returns, we are all about slashing debt and building real, long term wealth. With modern technology, it's become easier and easier to build wealth over time. The applications above are a good start, but anything that simplifies your financial life and makes budgeting, saving and investing easier and more sustainable is a great addition to your financial life. 

These are just a few of our favorites. What are your favorite personal finance IPhone Apps?

For more ways to pay off debt, save, and invest for the future check out the Totally Money Blog Carnival, hosted by The College Investor.

How is your Emergency Fund?

Last week was a scary time for many military and civilian federal employees. As government funding threatened to run out and congress debated budget cuts and funding for social service programs, there was a great deal of uncertainty surrounding whether or not members of the military and civilian federal employees would be receiving a full paycheck. Luckily, our leadership in congress was able to come to an agreement which will keep the government running and paychecks continuing to go to the employees who depend on them.

But what if congress had not come to a resolution? Many military and civilian employees would have been left in the lurch. How many would have missed important payments or been unable to support themselves? Far too many, I'm afraid.

If there is any silver lining in the drama of the past week's uncertainty regarding military and federal pay, it is this: It has reinforced the need for all of us to have a well funded emergency fund in an easily accessible, interest bearing account. If you don't yet have an online bank account consider the online savings bank ING Direct, where you can currently earn a $50 bonus when you open an Electric Orange checking account.

If you already have an easily accessible emergency fund, it may be time to ask yourself whether it is sufficient for your family's needs. I think that for many of us, the answer is no.

At compounding returns, we have often advocated working to build an emergency fund worth 1 year of living expenses. If this sounds like a lot, consider the fact that in recent years, the average job seeker required around 30 weeks to find new employment following a termination of employment.

It can be overwhelming to set that kind of a savings goal all at once. That's why we recommend scaled savings goals in building your emergency fund. Books like the The Total Money Makeover: A Proven Plan for Financial Fitness recommend an emergency fund of at least $1,000 before you begin paying off debt. If you are just starting to learn about personal finance, and don't yet have an emergency fund, $1,000 is a great starting point.

But what if you do have an emergency fund? Set a new savings goal. Challenge yourself to save another $1,000 or another month's worth of expenses.

Better yet, make saving automatic. Automated savings plans are one of the greatest things that internet-based banking brought about. Take a look at your budget, and divert as much cash as possible into your online savings account on a monthly, recurring basis.

If you are new to automating your finances, read automating your finances for more information.

The recent budget squabble proved that even stable careers like the military and federal government are only a whim of congress away from missing a paycheck.

As an active duty military member, it it was a call to action. It restored my family's commitment to building our emergency fund. To that end, we've started to divert even more money into ING Direct with our automatic savings plan.

How has the budget scare changed your financial habits or priorities?

For more savings strategies, check out the Totally Money Blog Carnival.

A Military Member's Guide to Surviving a Shutdown

Although it appears as if the US Congress will come to some sort of a stop-gap agreement for continued funding for the federal government, at least through next week, there remains the over-arching threat of a government shutdown in the coming weeks and months.

In the event of a government shutdown, federal government activity will grind to a halt, causing furloughs of non-essential personnel, as well as the shutdown of federally funded health and human services programs and many other services absolutely essential to the day to day governance, safety, and security of the United States.

Check out this great post from Cash Money Life: What Happens if the Government Shuts Down? for more information on what services and agencies will be affected by the government shutdown.

How the Shutdown Will Affect the Military: 

As an active duty military officer, the first question that springs to mind in any reference to a government shutdown is: how will this effect members of the military?

The wars in Afghanistan, Iraq and Libya will not end because government funding has dried up. The Air Force will still protect our skies. The Navy will still proudly sail the seven seas. The Army and Marine Corps will still patrol the streets of Baghdad and the mountains of Afghanistan. The Coast Guard will still defend our shores and respond to mariners in distress. Simply put, the military will continue to serve as it has for centuries.

Ryan at the Military Wallet recently published an excellent post describing exactly what military members can expect in the event of a government shutdown. Visit: Will Military Members Get Paid If the Government Shuts Down?, for more information.

Fact is, although the military will continue to serve at home and abroad. Military members will not be paid until the government shutdown ends. Troops will continue to accrue pay and benefits, which will be paid once congress authorizes a budget or continuing resolution, but in the mean time troops will be left to fend for themselves.

A Step by Step Guide to Getting Through the Government Shutdown:

Its a scary feeling to not know when your next paycheck will be coming. As the government shutdown becomes more and more likely and military members begin to make plans for the lack of a paycheck for an unknown amount of time, it is important that military members develop a plan for getting through the crisis.

compounding returns has come up with a step by step guide to getting through the short term lack of cash associated with the government shutdown. Read on to learn the best way to keep your financial house in order during these lean times.

Step 1: Review your budget. During times like these, having a working budget is essential to making it through the temporary loss of income. Review your budget line by line. Consider Mint.com- simple budgeting and planning, for more information on starting a budget.

Even if you are already living a no frills lifestyle, there are probably some ways you can cut back. If you have been shopping at the grocery store, consider the farmer's market instead. If you have been driving to work, try carpooling or public transportation. There's always something more you can do. Even small savings will help keep money in your bank account when the checks stop coming.

Step 2: Temporarily stop investing. If you have money taken out of your account to fund a Roth IRA, 529 Plan or Itemized Savings Account this is the time to suspend those contributions.

You need to shift your mindset from accrual mode to survival mode. Slashing expenses and stretching your dollar are the two most important things to do when you don't know when or how much you will be paid.

Step 3: Tap your emergency fund. I hope for your sake that you have an emergency fund built up for this type of contingency. If you hold this emergency fund in an online bank account like ING Direct Earn high interest with the Orange Savings Account - No fees, no minimums & no need to change banks! FDIC Insured now is the time to tap it.

Our recommendation is to schedule automatic transfers of money in the same amount as your paycheck. Schedule these to arrive on the day you would normally be paid. This will ensure that you do not miss a bill or payment when they come due.

Step 4: Withdraw from your taxable investment accounts. If you do not have an emergency fund, or have already tapped your emergency fund dry your next stop should be taxable investment accounts such as stocks, bonds, and mutual funds. Avoid withdrawing any money from tax sheltered accounts like 401(k) and Roth IRA accounts as you will incur a significant penalty.

Step 5: Seek help from your comrades in arms. Although military work life programs will likely be unavailable during the government shutdown, your military friends are an excellent resource for surviving any downturn. Consider pot luck dinners, car pooling, helping with yard sales and other ways you can support one another during these tough times.

Step 6: Make some tough decisions. The fact is, getting through the government shutdown may come down to making some really tough decisions, especially if it stretches on indefinitely or your family has an underfunded emergency fund.

The best rule of thumb when it comes to tough decisions is survivability. Although nobody wants to miss any payments, it is essential to set your priorities. If you are unable to pay all of your bills, focus on the basics. Food, water and shelter. If an expense is unrelated to these three essentials, it can wait.

Step 7: Call your creditors. If you have been called upon to make extremely difficult decisions like forgoing a payment, bill or other expense it is imperative that you maintain a close conversation with your creditors.

Although it is difficult to say what type of response you will get from each of these organizations or individuals, forgoing a payment without explaining your reasons or circumstances is a big mistake.

Hopefully, in this type of situation you will be able to defer a payment without penalty. If you work with a bank like USAA, Navy Federal Credit Union or another military financial service provider, chances are very good that they will work with you on any missed missed payment during a government shutdown as many of their customers are experiencing the same problem.

Step 8: Use credit cards temporarily and judiciously. Although at compounding returns we seek to primarily pay down debt, and save and invest for the future. Sometimes, for survival's sake, you need to pay with credit.

In this case, it is the lesser of two evils. This is especially true since military members will be entitled to back pay. Just make sure that you pay the cards off as soon as possible to avoid paying fees and interest. The choice between credit card debt and putting food on the table should be an easy one. Refer to step 6.

Come Payday:

Step 9: Repay your creditors. This situation will not last forever. When the checks finally do begin to roll in again, the first thing you will want to do is pay your creditors. Do not allow a missed payment, credit card balance, or any other "hanging balance" to upset your financial equilibrium for any longer than necessary.

Step 10: Repay yourself. In step 2, you stopped investing. When your back pay arrives and after you have repaid your creditors it is important to repay yourself. Restore your emergency fund, reinvest the money you took out of your taxable accounts, and begin contributing to your Roth IRA and other scheduled investments.

It's Going to be Tough:

Lets not kid ourselves. This is likely to be a difficult time to navigate financially. But, through proper planning, slashing expenses and tapping your savings strategically, your family can get through this. Just remember Chapter 2 of the The Military Survival Manual:

"A key ingredient in any survival situation is the mental attitude of the individual(s) involved. Having survival skills is important; having the will to survive is essential."

The Worst Things You Can Do With Your Money

Most days, we focus on making the right choices. But today, compounding returns is flipping the coin. Today, we are going to cover the top 10 worst financial choices you can make, starting with the bad and progressing to the inexcusable. So, without further adieu here are the 10 worst possible things you can do with your money.

#10: Don't track income, expenses or investments. If you want to screw up your finances, you can start by not tracking a dime. Who cares how much you earn, spend, or invest. That stuff is for the birds, cause you are going to be rich someday, right? You'll hit your numbers in the lottery, get a huge promotion, or strike it rich somehow! Who cares how easy websites like Quicken make it. You're not a math nerd and there's no way you're about to become one by tracking your expenditures.

#9: Leave it in a fee based checking account. More banks than ever are offering free, interest bearing checking accounts making paying for checking an unnecessary expense. If you want to spend money needlessly, don't even think about signing up with ING.

#8: Stash it in your mattress. Got a little extra dough? If you want to make sure it never gets put to good use, make sure you keep it in cash, and store it in a sturdy mattress instead of an interest bearing account. Lord knows its much safer in your bedroom then in an FDIC insured bank account.

#7: Spend it all. Some people don't make enough money to save yet, and are just barely getting by. But most of us know of some way we could stash a little more cash for the future. If you want to stay poor, then you'll definitely want to spend every dime, regardless of your income. That way you will keep the neighbors thinking you make more than you earn and never get ahead in life.

#6: Rent electronics. Speaking of impressing the neighbors, nothing says "I'm loaded" like a huge T.V. or sound system. Best thing about modern America is that you don't even have to buy them anymore. For only a small monthly payment, you could have the T.V. of your dreams! Who cares that it will end up costing you double what you would pay to purchase by the end of your contract... It's a sweet T.V.

#5: Rent furniture. Just like renting electronics, renting furniture will cost you much more in the long run than buying, with the added negative of significant wear and tear being placed on expensive consumer products that you don't even own. If you want to stay poor, you will want to rent the most expensive matching furniture set in the store, especially if you have children or pets.

#4: Finance vehicle customizations like rims and speakers. I'll tell you what will really impress your neighbors, not to mention keep you in debt indefinitely. Take some of your hard earned cash down to your local auto customization shop and buy the most expensive customization package you can get. Just make sure to finance the purchase over the longest term possible. This will cost you even more for a purchase that is likely to get destroyed by your daily driving habits.

#3: Don't invest. Buy lottery tickets. If you never want to retire, you will certainly not want to invest. You'll surely want to run down the local convenience store and pick up as many lotto tickets as possible. That way, you'll have a negligible percentage increase in winning chances, and be paying as much as possible. If you are lucky enough to win, great! You'll want to review this list so you can squander as much wealth as possible, and end up like the vast majority of lottery winners who soon go bankrupt.

#2: Casino gambling. If you want to stay poor, gamble as much as possible. Don't set limits, and definitely keep gambling when you get down. That way, you will just dig yourself deeper and deeper into the hole. Don't worry, this one will keep you poor, especially if you have an addictive personality.

#1: Spend more than you make. And that brings us to the #1 way to keep from building wealth. If you want to be poor for life, you will surely want to spend as much as possible. With the access to easy credit, you can easily spend at least twice as much as you make. That way, you'll maintain a negative net worth for as long as possible.

That's our top 10! Got any more to add? Please share in the comments below.