The concept of passive investing is appealing to most people. Being able to generate wealth with a small investment of time, effort or capital might seem too good to be true – and often, it is. But dividend investing is a straight-forward and legitimate passive income strategy.

Dividend investing for passive income isn’t foolproof. Sure, you can make money by picking a few dividend-paying stocks and putting money into them. But there are a few secrets to maximizing your returns. You can generate real, sustainable and growing income in the stock market.

Secret No. 1: Look for Dividend Growth

Would you rather hold a stock with a steady 3% dividend yield or one with a 2.5% yield and a track record of raising the dividend? If you’re thinking long term, the latter option is where your mind should be at.*

Are dividends passive income? If they are, investing in dividend-growth stocks means setting yourself up for a raise every few years. If you can count on your shares to appreciate both in value and in their dividend payouts, it’s a recipe for major long-term returns.

Secret No. 2: Get on a DRIP

Dividend reinvestment plans (DRIPs) automatically reinvest dividend payouts back into the company paying them, building your holdings. This is a top way to ensure your dividends are being handled at the time of payout, instead of having to manually reinvest them each quarter (or whenever they’re paid). And DRIPs don’t incur a brokerage fee, saving you money over manual reinvestment.

DRIPs are a great “set it and forget it” tool that can be switched off when you reach retirement age. You can turn your dividend payouts into passive income in just a few clicks.

Secret No. 3: Invest Through a Tax-Advantaged Account

Because dividend payouts are taxed as ordinary income, it’s usually best to minimize your tax burden by investing through a tax-advantaged account.* Holding dividend-paying stocks in an IRA or 401(k) means your passive dividend income is safe from taxation, so long as they remain within that fund.

One of the best ways to boost your dividend returns and passive income is to invest in dividend growth stocks through a self-directed IRA or 401(k), putting your holdings on a DRIP.* When you reach retirement, you’ll have those holdings to draw from, as well as the passive income they generate through the dividend.

Secret No. 4: Create Gains With Your Losses

Part of good portfolio management is going through your holdings every few years and cutting the poor performers. *Maybe you put a few thousand dollars into an penny stock that went south? Maybe one of your holdings cut its dividend and is languishing?

You can sell these securities to offset capital gains for the year and roll their principal into better dividend stocks. Or pick up a dividend-paying stock you’ve had on your watch list for a while. Cutting ties with a poor performer will let you put your money to work elsewhere, with potentially better results.

Use these four secrets to maximize your dividend investment strategy. More than just generating cash, you’ll be optimizing your best, most reliable source for passive income.*

Good investing,

Rob

*The views and opinions expressed in this piece are those of the author and do not necessarily reflect the official position of professional analysts.