Some people define their wealth by their financial net worth. They add up their assets like the value of their house, their liquid assets (including dividend stocks), their belongings, and anything else of value, and they subtract their liabilities like a mortgage or credit card debt. This is a fairly reasonable measure of someone’s wealth. In fact, I’d say it’s a better measure of someone’s wealth than their external income, which in my opinion far too many people focus on as their “wealth”.
When home prices fall, or the stock market retreats, their wealth, if defined by net worth, will generally decrease. We are currently in a period of high stock market volatility and many of us have recently lost a lot of paper stock value due to decreases across the market.
If you invest for the sake of passive income by means of dividends, and consider your wealth to primarily reside in the amount of passive income you receive from your own investments, then you are buffered against such setbacks that are out of your control. Dividends, unlike stock prices, are not determined by the masses. Stock prices fluctuate so much because they are determined by the supply and demand of the masses buying and selling habits, and the masses are often illogical and emotional. Dividends, on the other hand, are determined by actual company profits. They are set by the board of directors, and can only be discontinued if the board of directors chooses to, or is forced to, discontinue their dividend payouts. Most boards will do everything in their power to avoid this from occurring. So as long as you remain invested in healthy companies, your passive income should remain safe.
In fact, when the stock price of a company falls, the dividend yield of that company increases. For example, if the stock price is $50, and the company pays $1 in annual dividends, then the dividend yield is 2%. If the stock price gets cut in half to $25, but the company is still paying $1 in annual dividends, then the dividend yield has doubled to 4%. So when the stock market falls, dividend investors can find more attractive dividend yields as they add new money to their portfolio.
“So as long as you remain invested in healthy companies, your passive income should remain safe. “ — Well said!
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