The Motley Fool

3 Ways to Supercharge Your Dividend Income

I had written some time back about how one can go about building a resilient income stream by purchasing and owning dividend-paying companies. These companies are a boon for any portfolio. Why? Because they provide a steady and reliable stream of dividends that supplement an investor’s cash flows.

Let’s take this a step further and figure out how you can go about significantly boosting the dividends you receive in your portfolio. For an income investor, part of this process involves understanding how to increase overall dividend income without compromising other important aspects of the portfolio. With that said, here are my top three methods you should consider to achieve that.

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1. Buy a dividend champion

A dividend champion is defined as a company that is able to consistently raise its dividend over the years. Obviously, such companies are not easy to identify and they usually don’t come cheap. A clear risk in buying one would be a miss in meeting expectations of business growth and profitability, which could endanger the future stream of dividends.

However, if you correctly identify a dividend champion then you can simply sit around and enjoy increasing dividends over many years, even if your level of shareholding remains the same.

2. Accept scrip dividends

A scrip dividend is a dividend which is paid in shares, instead of cash. These are declared by a company when the company intends to conserve part of its cash reserves, yet still wants to reward loyal shareholders. My colleague Jeremy Chia had written about why scrip dividends are so attractive. One added benefit is that you can increase your shareholdings in the same company at a good discount on the latest market price of that particular stock.

This comes with a caveat though. Scrip dividends should only be chosen (if the option is provided) and accepted if you believe the company will continue to do well, and also if there are no other compelling investment ideas to allocate your money too. This allows you to build up your shareholdings without having to contribute any cash and what’s more, the dividends you continue to receive will increase proportionately over time.

3. Switch to stocks with higher yields

A third method is to take a close look at all the stocks you own, and assess which ones have lower yields than the target yield for your overall portfolio. Then you can go about searching for investment candidates with higher yields but which don’t come with higher risk attached. Of course, no two stocks can totally be an “apple-to-apple” comparison but an objective assessment of the potential risks and rewards should suffice for most investors.

By switching your capital from a lower yield stock to a higher yield one, your overall portfolio will enjoy a bump up in dividends as well. However, it’s important to note when doing this to ensure the higher yield stock has a solid track record of sustainable and growing dividends.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.