For an investor, dividends can be a welcome source of passive income. Often though, some more would be welcome. If I wanted to double my dividend income, here are three ways I could do it.
1. Increase my investments
The most obvious way to double my dividend income is simply to double the money I invest. If I hold twice as many shares at the same average yield, I will get double the dividends.
In practice, that relies on me having the available spare money to increase my investments. Even I cannot do that immediately, I could apply the same thinking to my investments from now on. Imagine that I currently put £100 a month into a Stocks and Shares ISA. Simply doubling that to £200 would be a straightforward way to buy twice as many shares in future.
2. Invest in higher-yielding shares
Another option would be to focus on higher-yielding shares. For example, one of the shares I own is Unilever. If I bought more Unilever shares now, I could earn a 4.2% yield from them. But another stock I own is tobacco manufacturer Imperial Brands. It yields 8.5%. So putting some money into Imperial instead of Unilever would get me a little over twice the yield.
But yield is only one aspect of a share. Sometimes, a higher yield can signify a bigger perceived risk. Imperial, for example, is heavily dependent on selling cigarettes. As demand falls in many of its developed markets, that could hurt the firm’s profits and ability to pay dividends. By contrast, I expect a growing global population to increase demand for the sorts of basic household items like shampoo and soap that Unilever makes.
That does not necessarily mean that Unilever will benefit. Local companies without the complexities of a global supply chain might be the ones to benefit, for example. But overall, the risks to Imperial’s dividend look higher to me than to Unilever’s. Indeed, Imperial already cut its dividend a couple of years ago.
If I bear in mind such risks – which I always do when investing in shares – then I could double my likely dividend income simply by moving enough of my portfolio to higher-yielding shares.
3. Focus on dividend income, not growth
A third approach to doubling my dividend income would be to reassess my investing strategy.
For example, imagine my portfolio is split equally between growth shares and income shares. I could move to a strategy where I focus the portfolio 100% on income shares.
I think diversification is an important risk management tool for me as an investor. But even if only invest in income shares, there is still a broad choice of companies from which to choose. So I think I would be able to maintain a diversified portfolio.
This approach may mean I miss out on some of the growth opportunities of young, dynamic companies. But on the other hand, it should significantly increase the amount of income received in the short-term compared to keeping a 50:50 mix of income and growth shares.