Dividends are easily one of the greatest sources of passive income.  Keeping up on your portfolio and doing taxes once a year are well worth it to receive payments that arrive like clockwork.  More so than a lot of other income sources, dividends are entirely dependent on how much capital you have.  For this reason, this income source takes time to build up, but what starts as a trickle of income eventually grows into a nice stream and ultimately a river.

As I’m 19 years old, and I’m far from a millionaire with buckets of capital to throw around, my dividend income is pretty paltry.  I do know, however, that I’m sitting well for somebody my age and my actions now will compound down the road.

As useful as dividends can be as part of a passive income stream, using them as such severely hurts our good old friend Mr. Compound Interest.  By consistently withdrawing dividend income, we aren’t letting compound interest do what it does best.  So it makes for a tricky road.  I’m trying to cover all angles though.  Here’s my current (definitely not set in stone) allocations for my dividend income:

40%- Withdrawn to pay taxes on dividends, interest, and capital gains. (What’s left over will be reinvested)

25%- Reinvested in more stocks/bonds.

15%- Withdrawn for income (spending money, bills, and ING savings)

20%- Used to pay existing student loans and college tuition.

Like I said, this is a flexible dividend allocation that will most likely change in the future, but I like how it serves multiple purposes, all of which are justifiable in my mind.  It’s a while between dividend distributions, since they don’t add up too quick at this point.  This fall or winter though, when I’m back at school, it’ll be nice to use that 15% that’s allocated for income to somewhat lessen my dependence on a time-sacrificing job (basically the whole point of passive income!).  I know reinvesting as much as possible at this point would be a wise move, but I plan on making excellent use of my time this upcoming school year, and I really don’t want to worry about a job on top of everything else. 

Some small dividend income is really the extent of my passive income right now, but it’s definitely a start!