Are dividends the secret to achieving financial independence?

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“A wealthy person is simply someone who has learned how to make money when they’re not working” – Robert Kiyosaki, author of best selling book Rich Dad, Poor Dad

Financial independence is something that many people aspire to. While the term means different things to different people, in general, financial independence means having enough wealth to live off, without the need to work actively to generate an income.

Imagine being able to spend your days doing whatever you want to do. Whatever makes you happy. No crowded commute, no 9-5, no annoying boss. It sounds rather appealing right?

While many articles have been written on how to achieve and maintain financial independence, most articles generally point to one fundamental concept – building up a passive income stream.

Passive income

“If you don’t find a way to make money while you sleep, you will work until you die” – Warren Buffett

Passive income is cash flow that is generated without actively working for it. It really is the holy grail of personal finance, and provides powerful options in life.

For example, sustainable passive income could give you the luxury of:

  • Retiring early
  • Travelling the world
  • Starting a business that you’re passionate about
  • Being your own boss
  • Doing a job that you really enjoy
  • Kicking back in the South of France with a cold bottle of Corona

In short, the options are endless. So how does one generate passive income?

Dividends – the key to financial independence?

There are many ways to generate a passive income stream.

Some investors choose to rent out property, while others start online businesses. A decade ago, higher interest rates made it possible to generate fairly decent rates of return from high-interest rate savings accounts. Investors could simply park their cash in secure bank accounts and receive 6% per annum risk-free on their capital.

However, the financial landscape has since changed, and with interest rates in the UK currently sitting at record low levels, the process of building a passive income stream has become more challenging.

That’s why, in my view, dividend stocks look so appealing right now.

By investing in a diversified portfolio of high-quality dividend-paying stocks, the investor can generate a steady stream of cash payments without having to actively work for that cash. Furthermore, by hand picking high-quality dividend growth stocks, it’s possible to build an income stream that grows at a significant rate year after year, easily outpacing inflation.

For those aspiring to achieve financial independence, dividends can be reinvested to capitalise on the power of compounding, generating more dividends in future. For those already there, dividends can be used to pay for life’s expenses.

The best bit – when it comes to dividend investing, it’s easy to get started. All the investor really needs is a brokerage account (preferably a tax-free account) and a small amount of capital.

So what are you waiting for?

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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