Dividends are a way for companies to distribute profits to their shareholders. They do so by paying investors per share of their profits of reserves. They offer an incentive to investors to own stock in a business as they provide a stream of income.
When a company pays a dividend, it transfers some of the value of the stock into the dividend, which then makes the stock price fall temporarily by the value of the dividend. It is better for a company to issue surplus cash via dividends than to hold it in its balance sheet as this encourages shareholders to buy more stocks rather than accumulate minuscule returns.
Dividends are typically paid every month, quarter, or year. The dividends are at the discretion of a company’s board of directors and therefore they are not guaranteed. Companies can issue or cease dividend payments at any time. With the right dividend investment strategy, it is possible to design one’s investment strategy solely on dividend income.
Let’s take a look at a few ways to increase dividends:
Invest in stocks that pay dividends
Usually, older and more established companies pay dividends, while newer companies usually do not. Therefore, it is important to hold enough stocks in your portfolio of companies that issue dividends. In addition, if you own enough stocks that generate dividends, it is possible to solely depend on your dividend income, although this takes many years of investing.
Reinvest dividends and buy more dividend stocks
It is important to reinvest your initial dividends, along with additional capital, into more dividend issuing stocks every month. Some stocks automatically reinvest a dividend which consequently results in higher dividend income every year. Note that the dividend growth rate per stock and inflation often correspond with each other.
Sell low-yield shares and reinvest in higher-yielding stocks
Selling low yielding stocks and reinvesting into higher-yielding stocks is a good strategy for increasing dividend income in the short-term. However, this increases the risk in your portfolio, as lower-yielding stocks tend to provide more stable returns in the long run; while higher-yielding stocks are prone to the effects of a recession, where any decrease in profit will affect the dividend payout. Note that low-yield stocks tend to have a higher growth rate than high-yield stocks.
SInvest in stocks with growing dividends
Another strategy for increasing dividend income is investing in stocks that have a growing dividend rate over time. It is important to do research on a company prior to investing in it to find its dividend history and growth rate. This serves as a means of evaluating if the company provides sustainable dividends.