How To Increase Your Dividend Income

Increase Dividend Income

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.

  1. Build up your emergency fund
  2. Pay off debt
  3. Save
  4. Invest

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

  1. Add to one of your dividend stocks, or
  2. 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.

  1. Tell your broker to automatically reinvest the dividend back into the stock that paid it
  2. 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.

SUMMARY

Increasing your income from dividend-paying investments is a key element to building wealth.  To increase dividend income, consider implementing these methods:

  1. Invest new cash in dividend-paying stocks
  2. Receive dividend increases from the companies you own
  3. Reinvest your dividends
  4. 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.

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

49 thoughts on “How To Increase Your Dividend Income”

  1. Hi Tom,
    I will make sure to check Jason’s More Dividends blog, sounds really interesting. Always curious to see what everybody else is buying. (the voyeur in me!).
    I stopped my DRIP a while back so I could buy whatever stock I wanted instead but I am considering going back to it. It was very simple to manage (nothing to do!).
    Cheers

    • Hi Caroline, Sometimes auto drip is the way to go. I used to auto drip everything, but not so much anymore. And agree, it takes all thought and action out of the process which sometimes is a good thing. Tom

  2. Very helpful approach, Tom. As you mentioned, the basics are key.

    As far as increasing dividend income, I believe #1 is this most important. This is our primary focus at the moment. It’s the most active out of the four that will likely have the largest impact.

    Re-reading the four suggestions, I also realized that items #1 through #3 also decrease in terms of “effort” in terms of increasing dividend income. #1 is new capital, #2 is new dividends, #3 is in a sense a repeat of.

    And I agree with you on #4 – it can be useful, but I believe the top 3 are the way to focus. – Mike

    • Very insightful Mike. Nothing really happens without number 1. I think age/time in the market plays a factor too. #1 is most important when you are younger and building your portfolio. #’s2-4 can then play a bigger role for older more established dividend stock investors. I used to rely heavily on #1 and now being a little older than the average dividend blogger can get nice income increases with 2-4. Tom

  3. nice List Tom.

    No argument’s here. Dividend raises are definately my favorite. haha.

    cheers

    • And that is no joke Rob. A good size dividend increase is one of my favorite things in life. If I worked for most of the companies I own, I doubt they would increase my pay as fast! Tom

  4. Hey Tom,

    Great ways to build wealth gradually, but steadily. I’ve never been clear on whether ETFs allow for commission-free dividend reinvestment. I know that mutual funds do, but I’ve never been clear on the mechanics of how to reinvest dividends commission-free when owning individual stocks or ETFs.

    Cheers,
    Miguel

    • Hi Miguel, I think it mainly depends on your broker. For example, my broker allows free dividend reinvestment on pretty much all stocks, mutual funds and ETFs. I can set my wishes at either the account level for all holdings in the account or at the holding level for just those holding I want to auto reinvest. Only in a few instances have I come across where a holding is not eligible for auto reinvest. It’s usually a less liquid security like a bond or preferred stock. Tom

  5. Tom,

    I absolutely agree that #1 is of utmost importance. I’m finding that as I invest more capital, the dividend increases and the effect of reinvesting dividends is amplified.

    • Hi Kody, Thanks for stopping by and commenting. You are right. Nothing happens without number 1! I guess that is why it is number 1. Tom

  6. Nicely laid out. I used to have a FRIP and loved it. Now it changed to a DRIP and the dividends are paid out in cash. I liked the FRIP more because I could use the dividends to buy any securities and not just the same one.

    Quick question: Which do you prefer and why: dividend-paying stocks more or a high yield dividend ETF?

    • First SMM, I have a question for you. What is a FRIP? I have never seen that acronym before.

      Regarding your question, I like having a portfolio of dividend paying stocks more. It’s just my preference. However, I like a dividend ETF in my IRA accounts. I don’t have as much money in my IRA’s so it’s harder to be diversified within the account. Also if one stock blows up, I can’t take a tax loss in the IRA. A large holding in one bad stock in an IRA can really blow up the account and the tax advantages those accounts provide. I do have some individual stocks in my IRAs, but have greater amounts in VYM for the diversification. Tom

      • Flexible Reinvestment Plan: it allows you to receive dividends and use those to buy any securities that you designate when you sign up for the plan at any percent level so that the total percentage allocation across securities you designate equals 100%. It was a nice feature, but my broker no longer has it. Thanks for your response.

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  8. FRIP was ScottTrade’s Flexible Reinvestment Program where you could designate dividends paid by company 1 to be applied to purchase shares in company 2 with no fee.

    I dislike option 4 as there are too many variables to ensure success – it is too much like market timing for my taste. However, I have used it over the years but only in conjunction with tax loss harvesting.

    • Thanks for the FRIP explanation SR. I had no idea. And, generally agree with you on #4 from my perspective. I like to buy and hold forever, if possible, so portfolio swaps are not a priority. Only with tax loss opportunities or when fundamentals change significantly for me. Tom

  9. How much of your dividend portfolio do you auto DRIP? I only have DRIP set up for two stocks, Husky and Sunlife. It looks great when I see ‘oh I have another share!” but I do like the control with the cash I receive to allocate it how I want.

    • When I was younger like my 30’s and 40’s GYM, I dripped 100%. Now I’m probably at about 20% or so. I like having more control now. When I was younger, working 60+ hours a week, I preferred it to be done for me. Tom

  10. Hi Tom, the dividend focused mutual fund or ETF sounds very interesting. I’ll definitely take a look. To me, choosing individual stocks is a lot of work. Thanks a lot for the information.

    • Hi Helen, I know you, like many, are not individual stock investors. That is one reason I continue to highlight VYM. I own it and it is a great option for many. Tom

  11. Tom –

    Nice educational session here that will be great for members in the community! Love the reasons you have listed.

    -Lanny

    • Thanks Lanny. I think we both have a little teacher in us judging from some of your articles. Have a great night. Tom

  12. This post is right in my wheelhouse, Tom! As you know, I employ all of these methods for boosting my dividend income. #1 through #3 are the mainstays, but I engage in #4 occasionally, too. Thanks for the mention with regards to options trading as well – I’ll do my best to share my experiences.
    I liked your response to Mike @ BD. #1 definitely gets the income going, and it may seem this is the only way to build up the dividend income at first. However, #2 and #3 slowly gain in significance. Eventually, #2 should dominate, allowing you to take your foot off the #1 pedal and let the portfolio grow on its own if desired. Good stuff!

    • Hi ED. Now that I think about it this post is all about “Engineering Dividends”. What you say has definitely been my experience over time. I use number 1 much less frequently than I did 10-15 years ago. Buying less might also have something to do with the lofty level of this late stage bull market. Tom

  13. Nice article Tom! It might be sufficient to hold S&P 500 ETF too 🙂 Not necessary to own a dividend ETF. I agree with all your points. The power of dividend reinvestment is fractional shares. Even if ETFs trade for free it is impossible to buy fractional shares.

    • Oh yeah DG. It’s hard to go wrong with the S&P 500. But you might know I’m a bit partial to the dividend payers specifically. 🙂 Tom

  14. This is a great summary Tom. I am actually a huge fan of using covered call options to increase my income. it’s pretty simple, I just time the market when it comes to selling covered call options. When my stock has increased significantly, usually at a 52 week high or all time high, I will pick that stock and write a cover call option with a strike price that will allow me to make an additional 15% on the stock if my options get exercised. If that happens I will make more money. If it doesn’t, I still make more money as the options will be expired worthless and I get to keep the premium. Win-win.

    • Thanks for the input Leo. I need to try it. My 89 year old father who is a life long investor and helped me get started investing just started dabbling in covered calls this year. If he can do it, I think I should be able to as well. Love your strategy. Thanks for sharing it here. Tom

  15. Great post, Tom! As you know from my blog, I love the concept of dividend investing. I’m a big fan of #3 particularly when it comes to DRIP. My largest core portion is dripping. I plan to build most of my core positions to the point where they DRIP. It will be a great way to reduce costs in the long run. It will also speed up the process. Thanks for including Engineering Dividends. I’m a big fan of his blog too. Thanks for sharing!

    • Thanks RTC. I used to DRIP all my holdings so I know what you mean by reducing costs and speeding the growth. Keep it up my dividend brother! Tom

  16. Nice summary. This is essentially what I was doing. I started in 2013 and built up over 20 companies. Then slowly, took it down to 17 companies. I was too heavy in energy, so I took it down this year and reallocated to existing holdings. I DRIP 100% now because I only plan on using that money as cash flow in retirement. I record passive income every month and hands down dividend investing is taking up a large part of that pie.

    • Very nice HP. 17 companies is just enough to get solid diversification as long as you are not over weighted in any one industry. Looks like you recognized that and made some good moves. Hopefully you bought most of those energy stocks starting in late 2014 after the oil price melt down and sold for nice gains. Maybe those portfolio moves/swaps also added to your dividend income?? Tom

  17. Could not agree with you more Tom, and in my latest post about my recent buys I referred to your first three items here as the three legs of the DGI tripod. Being a latecomer to the DGI approach, I’m definitely focusing on #1 for right now so #2 and #3 will pick up steam over time.

    I too am hoping to avoid #4 as much as possible, with my mindset being to buy / hold unless there is a dividend cut and/or the fundamentals of the company take a drastic turn.

    Your note about your father getting into options made me smile, as I too have been wanting to explore covered calls but need to educate myself more before I jump in.

    • Hey DD. When I read your post you refer to the other day about the DGI tripod, it definitely made me think about this article. You might be just getting started, but your not late. I didn’t start until my upper 30’s. Kody who also commented on this article is starting at 21. Talk about getting an early start. If I was only that smart at that age. All I had on my mind at 21 was working, spending all I made and having a good time. On covered calls, I don’t thinks it’s difficult, but like you I just need to think through it.
      Tom

      • You and me both, and that is why I am encouraging my boys to get started now. My boys are 19 and 16, and my older son has started with VYM as he isn’t interested in researching stocks as he spends his time on his car. My youngest is building up some savings before we open him a custodial account, and he is more interested in individual stocks as he loves researching (although he is more drawn to pure growth stocks right now, so trying to show him the compounding effect of dividends).

        My ideal goal is to see them positioned so that when they are my age (or earlier), they truly have the freedom to pursue whatever it is that they want to do. I’ve got about a decade for my personal goal of being in that spot by my early 50’s.

        • You are a good Dad. My father helped me in much the same way. VYM is a great option and it will be interesting to see how your young stock picker does! Seems like good blog post potential for the future. Tom

  18. I like all of these, including #4 which I try more and more to avoid doing these days, but as a value based investor I find it very hard to sit on a stock that has performed well with a reduced dividend yield when there are other good value stocks out there with more attractive yields!

    In hindsight, I’m pretty sure I’d generally be better off having held on to my original stocks than swapping – hopefully you can remind me of this next time I plan on selling one of the Fully Franked Fund holdings!

    Cheers,

    Frankie

    • You have some good thoughts here Frankie. #4 is a balance. One of the issues that keeps me from swapping a over valued, lower yielding holding is taxes. I don’t like to pay capital gains taxes. Sometimes I have realized losses to use as offset, but so much these days fortunately. Tom

  19. Hi Tom. I wouldn’t quite say that options, in this case covered call writing, is like dividend investing. Dividend stocks have a natural protection built in because, if they godown, the yield goes up. Writing covered calls us most profitable when using very volatile, read risky, stocks. You also need 500 to 1000 shares of each stock for it to be worth it. Then you might get $500 per month on a $30,000 position which can easily drop and cause big losses.
    I would recommend instead looking at a buy-write fund where a manager does this for you. Because they have lots of money to use, they can diversify and reduce the risk. I cover this in my blog here: https://smallivy.com/2018/03/10/is-a-buy-write-fund-right-for-your-retirement-account/

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