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2 ways I’m trying to grow my passive dividend income by £1,000 this year

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Passive dividend income is one of the main reasons why I invest in the stock market. It allows me to generate money via dividends that I can either spend or reinvest. At the same time, I’m still holding the shares and so can benefit from any potential rise in the share price over time. I don’t want to become complacent with the dividend shares I own though, so here’s how I’m thinking of growing my income this year.

Building up my investment pot

I want to assume that I currently make £1,000 a year in passive dividend income from my portfolio. Given my risk tolerance, my average dividend yield that’s helping me to achieve this is 3%. This means that my overall investment value is £33,333.

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It might sound obvious, but the easiest way for me to increase the income I receive is to invest more. If I have the ability to invest another £33,333 right now, or a few thousand each month, then I can double my dividends received. 

There are always risk, of course. But as long as I invest in a mix of stocks, I wouldn’t be increasing my risk by doing this. In fact, the broader the scope of companies I own, the lower my risk becomes of just one defaulting or cutting dividends.

However, I’m thinking about growing my income because I don’t have a large amount of cash lying around to invest. So I need another option.

Tweaking the dividend yield

One option I can look at is investing in higher-yielding stocks. This would allow me to increase the passive dividend income I receive without having to put fresh money in. 

For example, I could look to sell some stocks and buy others with dividend yields of around 6% instead. Using my numbers from earlier, my pot of dividend shares worth around £33,000 would now make me £2,000 a year. I’ve doubled the amount of dividends I’ll be receiving.

I might wonder why everyone isn’t doing this. The reality is that this is a high-risk approach. Firstly, I’ll incur transaction fees in selling and buying these stocks. Depending on the share price I bought my original stocks at, I might be selling for a loss.

Added to this are issues with buying stocks with high yields. It’s not always the case, but usually higher yields mean higher-risk. For example, the yield might be high because the share price is falling. So I need to be careful that I don’t sacrifice future income for short-term potential.

Sustainable passive dividend income

Whether I choose to increase the size of my investments or simply to flip to a higher yield, I want to ensure my income from dividends is sustainable. The last thing I want to do is change things that are working and end up with something that isn’t. However, provided I invest in good companies with reliable dividends, I can look to build on my existing portfolio successfully.

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jonathansmith1 has no position in any firm mentioned. The Motley Fool UK has no position in any firm 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.

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