2022 is now coming into view and this means I can start planning for a new investing year. One specific area that I want to focus on is how I can increase my passive income from dividend shares. This relates not only to my existing portfolio of stocks, but also to any new investments that I’ll make in the coming year.
Working out what I want to achieve
The first step I’d take is to calculate the current average dividend yield I’m getting. If I only own one dividend share, this can be quick and easy. I need to look at the dividends that I’ve received over the past year and divide what I got per share by the share price that I paid. This will give me the dividend yield.
If I hold multiple dividend shares, this can take slightly longer, but is a worthwhile exercise. I might find that over the past year, the dividend per share that I’ve received is higher or lower than previous years. So my overall yield might not be the figure I had in my head.
When I’ve got my overall yield, I can then be in a better position to increase it. The second step is to figure out how much more I want to target. For example, I might decide on a monetary amount, such as making an extra £1,000 in passive income in 2022. Or it might be a yield pick-up to beat inflation. If my average yield is 3%, then I could set a target of 4%, to outstrip the current inflation rate of 3.1%.
Making changes via dividend shares
From here, I now need to focus on rebalancing my portfolio. The easiest way would be to sell off the lowest-yielding stock in my portfolio and replace it with a higher-yielding one. For example, I could sell one stock with a yield of 2% and replace it with a stock yielding 4%. I should be able to see an uplift in my average yield just from doing this.Â
I do need to be careful about a few things though. Firstly, I’ll need to check that I’m in profit overall on the dividend share I’m selling. There’s little point selling a stock from which I’m picking up a 2% yield if I’m down 20% on the share price. Ideally, I’ll want to exit stocks for a profit and look to reallocate that money to higher-yielding options.
If I’m currently making losses on some dividend stocks, then I can hold on if I think the outlook is positive. In this case, I’d go to my fourth step and look to make use of fresh money I get in 2022 to invest in higher-yielding stocks.
This will also help me increase my overall dividend yield. And it will increase the number of stocks I hold, which can act as a benefit from diversification.Â
Overall, by sitting down and looking at my dividend shares now, I can build for next year.