Seeking a fast track to financial freedom? These are the three quickest methods to setting yourself up to retire comfortably on dividends

As the cost of living continues to spiral, it’s unsurprising that many average Americans are starting to wonder if the concept of financial freedom is actually an urban myth.

According to the Federal Reserve Bank of New York, household non-houseing debt rose to $4.80 trillion in the US, with credit card debt alone rising to $1.08 trillion in Q3 2023.

But a recent survey by personal finance firm Achieve revealed that roughly 11% of Americans have already crossed their target for financial freedom.

If you’re looking for a fast track into this exclusive club, dividend stocks could be your ticket. Here’s how.

Don't miss

• Commercial real estate has outperformed the S&P 500 over 25 years. Here's how to diversify your portfolio without the headache of being a landlord

• Rising prices are throwing off Americans' retirement plans — here's how to get your savings back on track

• 'A natural way to diversify': Janet Yellen now says Americans should expect a decline in the USD as the world's reserve currency — 3 ways you can prepare

Dividends are the key

Investing in dividend stocks is tricky, but if you find the right ones you could strike the perfect balance between reliable passive income and long-term capital appreciation. If the underlying company is growing and dividends are increasing over time, you could beat inflation with passive income. This wouldn’t be possible with a fixed-rate savings account or bond.

However, plain vanilla dividend stocks aren’t enough in this environment. The average dividend yield of the S&P 500 is currently hovering between 1.52% and 1.58% — far below the rate of inflation and, for that matter, the yield on a 10-year Treasury. That’s why investors need to seek out niche dividend stocks to achieve financial freedom in 2023 and beyond. Here are the top three strategies.

1. Dividend Aristocrats

To understand why dividend aristocrats are special, you need to understand how dividends are generated.

Companies have two choices with excess cash left over after meeting all their operational requirements: reinvest or reward. Either the cash is deployed back into the company to fuel growth or it’s handed back to shareholders as a reward for their patience and capital. Most companies either reinvest all cash into growth or pay all excess cash in dividends which keeps the stock price stagnant.

However, the companies on the Dividend Aristocrats list do both and have managed to consistently for over 25 years, which indicates that not only are they profitable, they're expanding. For investors looking to preserve their purchasing power through periods of high inflation, this is especially important.

If that sounds appealing, funds like the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) deserve a closer look.

Read more: Rich young Americans have lost confidence in the stock market — and are betting on these 3 assets instead. Get in now for strong long-term tailwinds

2. High-yield REITs and mortgage REITs (mREITS)

Real estate investment trusts (REITs) are designed to generate income from collecting rents on a portfolio of properties and pay out a minimum of 90% of taxable income as dividends. In other words, it’s an easy way to get real estate exposure.

REITs such as Realty Income (NYSE:O) offer monthly payouts and exposure to high quality properties. This REIT currently offers a 5.9% dividend yield.

Typically, REITs generate income from collecting rents. But there’s another type of fund that generates income from collecting interest payments on mortgages. These are known as mortgage REITs or mREITs. In an environment of rising interest rates, these niche funds could be just as attractive.

The iShares Mortgage Real Estate Capped ETF (BATS:REM) and VanEck Mortgage REIT Income ETF (NYSEARCA:MORT) are perfect examples of this niche financial instrument. They offer dividend yields as high as 9.6%.

3. Covered call ETFs

Another niche financial instrument that could supercharge your dividend investing is covered call ETFs. These funds hold a portfolio of traditional stocks and generate income by writing call options against them. Writing a call option means you let traders in the market pay a premium for the right to buy the stock at a future date and a fixed price.

This strategy is (theoretically) low risk because most options are never exercised. That means the fund manager gets to keep the premium. Even if the call option is exercised, the fund is compensated for the value of the share and retains the premium that was paid upfront.

Funds like the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) offer dividend yields as high as 12%.

What to read next

• Finish 2023 stronger than you started: 5 money moves you should make before the end of the year

• Worried about the economy? Here are the best shock-proof assets for your portfolio. (They’re all outside of the stock market.)

• Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2023

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.