A Stocks and Shares ISA could be a good way for me to earn some passive income. Investing in shares that pay me dividends may help me generate extra earnings without working for them.
But what if I like this passive income so much I want more of it? Here are three ways I could try to grow the dividend income I receive from my ISA.
Invest more in my Stocks and Shares ISA
One simple way to increase my dividend income would be to invest more in dividend shares. That sounds obvious but it can actually be a very powerful tool to boost my dividend income. Simply by putting more money into my ISA, I would hopefully receive more dividend income.
In the short term, the difference may not seem significant. If I put an extra £100 this month into my ISA at an average dividend yield of 4%, it would only offer me the prospect of another £4 of dividend income next year. But one of things I like about dividends is the way they can go on and on. That extra £100 in shares now could earn me £4 next year – and the year after that, and the year after that and so on for as long as I do not sell the shares.
Dividends are never guaranteed. But with a suitably diversified portfolio of income shares, I would hope that even a small amount of extra money invested in my Stocks and Shares ISA today could still be rewarding me with passive income long into the future.
Reinvest my dividends
Another way I could try to grow my dividend income is by reinvesting dividends instead of taking them out as cash. That is because of the power of compounding. Imagine I invested £1,000 in a share yielding 8%, like Direct Line. I could hope to receive £80 every year in passive income. But an alternative would be to reinvest my dividends.
In the beginning, the results might not seem dramatic – after a year I should have £1,080. But after a decade, my investment should have grown to over £2,150. In other words, by doing nothing except reinvesting my dividends in the same shares, the size of my shareholding could have more than doubled. So hopefully my dividends would have more than doubled too.
In my example, I presume the dividend and share price stay the same. That may not happen. But the example illustrates the power of compounding to boost my dividend income.
Invest in higher-yielding shares
I try never to chase dividend yield for its own sake, preferring instead to focus on buying quality companies at an attractive price.
Over time though, a great company can sometimes see its share price pushed so high that selling it and reinvesting in another quality share could help me unlock more dividend potential from my Stocks and Shares ISA.
That is why, sometimes, I decide to sell shares in one company and reinvest in a higher-yielding one. That can boost my dividend income. But I always make sure to bear in mind that whatever the yield, my focus is on finding shares in great companies I can add to my Stocks and Shares ISA at an attractive price.