Don’t confuse passive income from dividend income. Though both are similar in some ways, they also have very significant differences that make them unique.
Passive income is income derived from investments, businesses, and yes, even dividends. Its exact opposite is active income or income derived from exerting an effort. Hence, passive income is an income earned even without working or exerting an effort. Dividend income on the other hand is an income derived from owning shares of a certain company or business or being a part of a financial organization. Strictly speaking, a dividend income could be considered as a form of passive income but passive income will not always be dividend income.
One of the most common ways of earning dividend income is through buying and owning shares of companies listed in the stock market. If the company is profitable, it shares its earnings to its investors by giving out dividends. Dividends are being given out on a per share basis hence each share is paid a certain amount of dividend so the more shares you own, the greater would be your dividends.
Aside from the stock market, another way of earning dividends is through joining cooperatives or other financial institutions. These financial institutions either pool money and invest it or let its members use it for personal purposes in exchange for an interest rate. Such interest provides the company or institution an income which, on a scheduled date, is being distributed to the members in the form of dividends.
Summing it all up, dividend income is just a share of a certain company or institution’s income.
Passive income on the other hand have different forms and one of which is dividend income. Just think about passive income like an umbrella that covers everything that generates income without requiring much work.
Investors earn passive income by merely putting money on something that they believe will make their money grow. Aside from earning through dividends, investors also earn by the appreciation of the value of their investments. They get it low and after some time, sell it high resulting to profit.
The same can be said about businesses. Businesses earn and sustain through the sale of goods or services. With the exception of small businesses, medium to huge ones doesn’t require much effort in selling but rather just mere supervision or strategic planning. The business earns by itself resulting to income.
Another major difference between a passive income and dividend income is that passive income may require some effort in order to establish while dividend income may not. If you’re going to start a business, you have to look after it in its early stages or else it will fail. Earning dividends on the other hand may not require such effort since all you need are shares of companies or a few financial institutions.
Dividend income is one form of passive income so dividend income is passive income but passive income will never be a dividend income all the time.