For many years I’ve been a big fan of investing for dividend income. I find that many stocks paying dividends are more stable, conservatively run companies. The fact the company actually pays shareholders actual cash shows management respects the ownership that funded the business.
The downsides to dividend investing?
1. It takes money to make money with dividends. If you have more time then money you are better to focus on forms of passive income that require only (or mostly) time (like writing an ebook or contributing to revenue sharing sites).
2. Dividends can be cut. You can’t control and will find it hard to predict a dividend cut. Worse, when the dividend is cut the stock price often takes a serious beating.
3. Collecting dividends is not as tax efficient as capital gains treatment in the US and Canada (and maybe other countries).
However, in my opinion the opportunity for steady and occasionally increasing passive income far outweighs the disadvantages of dividends.
I currently follow a DRIP strategy for all my dividend stocks. DRIPs or Dividend ReInvestment Programs are company sponsored plans were dividends are automatically reinvested in more shares of the company. This slowly grows the dividends each quarter (compounding) since each time a dividend is declared you have more shares then last time. DRIPs also allow investing in fractional shares from dividends and additional optional cash investments.