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One of the best way to build your personal wealth is to increase your income. This income can come not only from your active daily work but also from some passive form, such as from dividends income. The question is how to increase the percentage of your income that is coming from dividend.
The Reasoning
Like I’m always saying, you can build your wealth by creating/increasing the gap between income and expense. You can lower your expense, increase your income or some kind of combination of both. This gap is what is called the free cash flow. This is a very important concept because it’s using this free cash flow that you can:
- Create or increase your emergency funds;
- Invest for your future;
- Save for a project; and
- Pay off your debts.
The focus of this article is not to help you reduce your expense but your can find plenty of ideas here.
However, there is only a finite way to reduce your expense and there is a limit to the amount of your expense you can cut. On the other hand, there is no potential limit to increasing your income! It’s basically unlimited! In this case we will look at some ways to take some of this potential and change it into an increase dividend income.
What are Dividend?
For those who don’t know, dividends are a participation to the profit of the company. It’s a payment to the shareholder in the form of cash or stocks. Company with a more stable share price often offer dividends to shareholder to entice investor to buy their shares and to stay invested in the company.
The Dividend Portfolio
The first step in increasing your dividend based income is to first build yourself a dividend portfolio. For that, you need to buy share in company that gives dividends or buy into a dividend mutual fund or ETF. Here are some general guidelines:
- Portfolio foundation of 3 to 5 companies;
- Diversification by owning 20 different companies in different sectors
- Another way is to invest in a dividend focused mutual fund or ETF. There are some advantages for both solutions.
Congratulation, you now have the foundation ready for a dividend based income increase.
1. Adding Cash to Your Dividend Portfolio
You have reduce your spending by following my advice and you have have some cash on hand?
Great!
You have created what is called Free Cash Flow. This free cash flow can be use to increase dividend income by investing in your dividend portfolio:
- Add a new position to your dividend portfolio;
- Buy shares of one of your position.
To measure the actual dividend income increase is simple. The yield of the stock times the amount of share.
Example:
You bought 100 shares giving 2$ per share each quarter. You will receive an extra 200$ every 3 months.
Note:
Don’t forget to do your due diligence before initiating a new position!
2. Dividend Increase
This one is the best one. Why? Because you do not have anything to do nor to invest. This dividend income increase is purely due to the companies you are invest in increase the amount of money per share they are distributing. A lot of dividend paying companies increase their dividend annually.
However, keep in mind that a dividend increase is not a given.
The dividend increase can be from a small 0.5% or as high as 10%. This will increase dividend income by the same amount.
Some dividend champions are really good at increasing their dividends years after years without interruption. These are some of the best companies to hold.
You let them do all the increase dividend income work!
3. Dividend Reinvestment
One of the best idea is to reinvest your dividend as soon as you get them. Similar to the Adding cash to your dividend portfolio above, re-injecting the money into the portfolio will give your an dividend income increase because you are adding to your position. There are 2 ways to do it:
- Reinvest the dividend automatically. This can be set up with most brokers;
- Periodically reinvest your dividend in dividend stocks of your choice.
Reinvesting the dividend does make sense sinces it’s not money that you is given to you by your normal daily job. As such, in most case, it would be some extra free cash flow that you do not need.
4. Dividend Portfolio Swaps
This is the least preferred method to increase dividend income.
Selling a position you own to start or add to one you have.
As a dividend growth investor, I prefer to hold onto companies for a long time, forever if possible.
However, let’s face it, even the best of plan doesn’t always hold off against really and sometimes you will need to get rid of a position to acquire a better one.
As an example. One of your stock price has risen considerably over a short amount of time. The actual dividend income yield will be lower. You might want to get rid of all or part of that stock to buy a different, higher yield, dividend stock that will ultimately increase dividend income.
Conclusion
A dividend income increase, has any other income increase, is a fanstastic idea. It will increase your free cash flow and will give you extra opportunity. This increase dividend income can be achieved using the following:
- Add cash to your dividend portfolio;
- A compagny which you own declare a dividend increase;
- Reinvest the earned dividend to add/buy position;
- Swap a position for a higher yield one.
All in all, the objective is to increase dividend income to increase your free cash flow.
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