I’m always on the hunt for ideas that could increase the amount of passive income I get. After all, there are very few things not to like about making money without having to make a huge effort to get it. One of the main ways that I try and make this type of income is via dividends from companies. Here are a few ways that I’m trying to squeeze more juice out of that lemon for 2022.
Looking out for faltering stocks
The first thing I’m doing is reviewing my portfolio to see if any companies have cut or suspended the dividend payout since I last checked. I have to remember that once I’ve bought a share, the dividend yield isn’t set in stone. There are two parts that go into the yield calculation. It includes both the share price and the dividend per share. So even though the share price is fixed from when I purchased shares, the dividend per share can change.
Therefore, even though the money I make from dividends counts as passive income, I do still need to pay active attention to the changes in yield. As a result, if I spot that a company has been reducing the dividend per share, I need to consider why. If the outlook going forward isn’t positive and the company is struggling, I might want to consider selling the stock.
We at The Motley Fool believe in long-term investing, but holding on to a permanently underperforming stock isn’t a good idea for me. With the money I raise from selling, I could reinvest the proceeds in a stock with a higher dividend yield (and stronger future prospects). In this way, I’ve increased my passive income overall.
Pulling my yield higher
The second point I can consider is boosting my overall dividend yield via investing fresh money. Let’s say that I currently make £1,000 a year in passive income, with an average yield of 5%. If I have some spare funds that I’m happy to put to work, I can add in some stocks with yields in excess of 5%. This will help to pull my overall yield higher.
For example, if I manage to increase the yield from 5% to 6%, this extra 1% equates to £200 in passive income annually. It shows that even a small increase can provide me with a good uplift in monetary benefit.
One point to note here is that by reaching out for high-dividend-yield stocks, the risk usually increases as well. So I need to be careful regarding my stock selection for these type of companies.
Passive income from share price gains
The final point to consider is to buy dividend shares that have historically seen the share price make gains. For example, SSE has offered a minimum dividend yield of 5% over the past three years. During this period, the share price has risen by 40%. Given the share price increase, I can make passive income from drawing out some of the profit from this rise while leaving the original amount invested.
Clearly, past performance is no guarantee of future returns. But if I’m confident on the outlook of a stock going forward, then I can use potential share price gains to boost my passive income in the years to come.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.