Dividend stocks are a great way to earn passive income. Companies that make enough cash to consistently pay (and raise) a dividend often outperform the broader market. For instance, dividend aristocrats produced an annualized total return of 10.8% over the last 15 years, beating the 8.5% return of the broader S&P 500, according to S&P Global.

Moreover, high-quality dividend-paying stocks tend to be less volatile. For instance, the dividend aristocrats collectively declined about 9% through the first 10 months of 2022, but the S&P 500 dropped 18% during that time period. In a nutshell, a well-chosen dividend stock can beat the market while sparing investors the anxiety that comes with huge fluctuations in their portfolios.

However, there is a downside. Passive income investors must diligently monitor the financial performance of each stock in their portfolio to ensure the dividend is sustainable. Payout ratio -- the percentage of net income paid out in dividends each year -- is one of the most critical metrics to watch. According to Hartford Funds, stocks with a dividend payout ratio of around 40% tend to outperform the S&P 500 most frequently, while those with a higher payout ratio are more likely to cut their dividends at some point.

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Source Fool.com