Increase Dividend Income
I am a big fan of increasing income to build wealth. Not only active income from work, but also passive dividend income. Today we look at several ways to increase dividend income.
WHY INCREASE DIVIDEND INCOME?
We all can build wealth by creating a gap between our income and expenses. Most importantly, by increasing income, reducing expenses or a combination of both, free cash flow is created.
With your monthly cash flow, you can do a number of things.
- Build up your emergency fund
- Pay off debt
These are the basics to create wealth and achieve financial independence.
You can find a lot of information about reducing costs. Housing, cars, and food are usually big targets. Much of it is common sense and self-discipline.
On the other hand, I like to focus on increasing income. Why? Costs can only be decreased by so much. In contrast, the potential to increase income is unlimited. And if you want to live off dividends to cover expenses, more income is better.
So, let’s get on with some methods to increase dividend income. Use these 4 methods to create a rising stream of monthly dividends from your dividend income portfolio.
PORTFOLIO OF DIVIDEND STOCKS
First of all, you need a group or portfolio of dividend stocks. But how many do you need?
It can be as few as 3 stocks.
A foundation of 5 dividend stocks is better.
In addition, solid diversification is achieved by owning 20 to 25 companies.
You can get some ideas from the Dividends Deluxe Model portfolio. Furthermore, I have completed a Dividend Deep Dive for many of these stocks.
A dividend-focused mutual fund or ETF is also fine. Most of the ways to increase dividend income still apply. My favorite is the Vanguard High Dividend Yield ETF (VYM). It is one of several solid choices among the line up of Vanguard dividend ETFs.
With your portfolio of dividend stocks in place, here are the four primary ways to increase your dividend income:
INCREASE DIVIDEND INCOME – #1 ADD NEW CASH TO YOUR PORTFOLIO
If you make more money from your job than you spend during the month, you have created free cash flow. Increase dividend income by using that free cash flow to
- Add to one of your dividend stocks, or
- Initiate a position in a new dividend stock
As a result, your dividend income increases. The increase is the amount invested times the stock’s dividend yield at the time of purchase.
If you want to check the pulse on who is buying what in the dividend stock blogging community check out Jason’s More Dividends blog. Jason posts weekly on who is buying what! It is a great feature to see what stocks other dividend investors are buying.
INCREASE DIVIDEND INCOME – #2 RECEIVE DIVIDEND INCREASES
Dividend increases are my favorite way to increase dividend income. There are many dividend-paying companies that increase their dividend on an annual basis.
The actual amount of the dividend increase depends on a number of factors. The increase can range from a few percentage points to 8% or even more. Some companies increase their dividend payments annually for many years without interruption.
They are the kind of companies I like in my portfolio. Hence, buy, hold, and let the company do the work to increase dividend income.
INCREASE DIVIDEND INCOME – #3 REINVEST YOUR DIVIDENDS
It’s a great idea to reinvest your dividends to accelerate monthly dividend income growth. The dividends you receive reinvest immediately back into your portfolio of dividend stocks.
There are 2 ways to go about it.
- Tell your broker to automatically reinvest the dividend back into the stock that paid it
- Let your dividends accumulate in cash and periodically reinvest them in a stock of your choice.
INCREASE DIVIDEND INCOME – #4 PORTFOLIO SWAPS
Finally, you have the option of selling some or all of a portfolio holding and replacing it with another. I’m not a huge fan of this method since I prefer to buy and hold forever. However, sometimes the best plans do not work out.
Let’s assume a stock in your portfolio has increased in value by a significant amount. This is great news. As a result, it may have created a very low dividend yield. A stock’s dividend yield moves in the opposite direction of the stock price. You may decide to sell all or part of this stock. Then, reinvest the proceeds in a different stock with a higher dividend yield. As a result, you increase the dividend income.
Increasing your income from dividend-paying investments is a key element to building wealth. To increase dividend income, consider implementing these methods:
- Invest new cash in dividend-paying stocks
- Receive dividend increases from the companies you own
- Reinvest your dividends
- Swap lower-yielding companies with those that have higher dividend yields.
In addition, some investors use options to increase dividend income. I have never personally used this strategy. If you would like more information on the topic, check out the Engineering Dividends blog.
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