With inflation still running hot around 10% and the cost-of-living crisis very much present, passive income generation is a key aim for many investors. Dividend shares provide a way to make such income. But even for those who have an existing dividend portfolio, here are some ways to try and extract as much value as possible for the year ahead.
Timely reinvestment
It’s always nice when I get the notification that a dividend has been paid. Yet for some, there’s a tendency to not have any urgency about putting that cash back to work. Granted, an investor might need it for bills or other life expenses.
But for those wanting to build an income pot that can grow, it’s key to reinvest the proceeds. This allows us to make the most out of our cash payouts. The quicker this is done, the more time there is for the money to compound going forward.
It might not seem like a big deal to sit on the cash for a month or more. Yet it can make a large difference over time. This is not only from losing out on the benefits of compounding but also from the drag of inflation eroding the value of the cash.
Tactical high-yield options
For investors who have an existing portfolio, it can be an option to raise the dividend yield overall by including a few high-yield stocks.
For example, let’s say an investors has £10,000 invested in 10 dividend stocks with an average yield of 4%. There are currently a dozen stocks across the FTSE 100 and FTSE 250 with a yield of 8% or higher. By investing £1,000 in two or three of these shares over the coming months, it can add to the yield easily.
In this case, the portfolio value could sit at £11,000, but the average yield would rise to 4.35%. This goes to show that even by adding just a couple of extra stocks into the mix, the overall yield can tick higher nicely.
Don’t throw good cash after bad
The final option is to plan ahead for potential bad news with existing stocks. Does the latest trading update have a revision lower in financial expectations? Has the business been struggling with cash flow? Has the trend been to reduce dividend payments over the past year?
All of these points would be red flags for me going forward. I’m not suggesting investors frantically sell stocks at the first sign of concern. But if a company looks like it’ll reach the stage of paying no dividend in the near future, I don’t think we should be putting fresh cash into it.
Rather, new cash should be allocated to strong businesses that have the opposite of those concerns. That is, improving cash flow, rising revenue and higher dividend per share payments.
Each of the three points should help to add value for investors who want to maximise the potential yield from their portfolio this year and beyond.
