I think there are several ways to turbocharge a dividend income stream. Some of them of are more straightforward than others, but all deserve some consideration.
Accelerate your savings rate
There is no better way that I know of to rapidly increase your dividend income stream than boosting your savings rate. Ultimately the amount that you have to invest has a direct correlation with what you are able to save. If you can boost your net savings rate, then odds are that any surplus that you save can be redeployed into dividend generating stocks to boost your dividend income.
And so how exactly do you boost your savings rate, and what is a good savings rate to aim for?. Unfortunately, there are are no easy answers on this one. How much you save is directly tied in with the lifestyle that you have and the compromises that one is willing to make.
But to put this in some perspective, the average US national savings rate was about 3.3% at the end of 2012. This represents the amount that US households are saving as a % of their income.
If you ask me, anyone that saves such a low percentage is probably not even on track to any sort of comfortable retirement, let alone an accelerated one. It should be possible to save at least save 20-25% of your income if you pay yourself first.
We save close to 40% of our income, most of which makes its way back into some sort of investment. And thats after contributions are made into the 401k, and the mortgage. Prior to having kids, our savings rate was significantly higher, probably closer to 70%.
Adopting the frugal lifestyle will also go quite some ways to helping with expense control and in controlling lifestyle inflation, allowing you to increase your dividend investments over time with increases in income.
Borrowing to Invest
This one tends to get a bad wrap, but depending on your risk tolerance, you can get a nice boost to your dividend income by selectively borrowing to buy high yielding dividend stocks. Interest rates are still low, interest that you pay is tax deductible. If chosen properly, you can use other peoples money to build wealth and a dividend stream much faster than you could on your own.
Again, there are pitfalls to watch with borrowing to invest. Investment lending does need to be used responsibly, in moderation and with the right types of investments. A failure to do so can leave you exposed if there are sudden market moves downward.
I have been using investment lending to build my dividend stream almost since the time I first invested. While the ratio of my loan to total equity is now approximately 10%, there was a time just before the 2008-2009 crash that my loan balance to portfolio value was almost 50% (ie I had close to a $200k loan on a $400k portfolio).
Having a debt to equity ratio that is so high leaves you in a tough position should asset values plummet. And we all know what happened during 2008 to 2009. As stock prices declined, I was forced to take proactive action to sell stock so as to not receive a dreaded margin call.
This is when your lender gives you a call and tells you that your equity balance isn’t sufficient to cover your loan amount, so you need to sell stocks or inject some cash into your account. I estimate that I probably lost some $50k as a result of needing to make forced sales at wrong times.
Reinvestment of dividends can be a great way to accelerate a dividend income stream. It can put money to work for investment when you otherwise don’t have any spare income to invest. Additionally, where you have a regular investment program, reinvestment of dividends can add significant momentum to your dividend machine.
When combined with a portfolio that consists of high yield dividend income stocks, redeploying high yield dividends into stocks that have higher dividend growth can lead to an ongoing, fast growing dividend income stream. You get the benefit of reduced volatility, from dividend sloths combined with a higher growth dividend income stream.
A common way to reinvest dividends is by way of DRIPs , which is automatically reinvesting the dividends back into the same stocks that paid them. However, blindly reinvesting your dividend income into your portfolio irrespective of prevailing market factors doesn’t make for the most optimized use of dividend income.
The mood of Mr. Market can create valuation opportunities at any point in time, which an investor can take advantage of with a more strategic, optimized dividend reinvestment strategy. Mr. Market’s moments of panic can turn low yielding, high growth dividend stocks into high yielding, high growth dividend stocks.
Selective reinvestment can get you dividend bargains at various times, which can greatly accelerate your dividend income stream and provide significant total return.
For those that are feeling more comfort with their investing, it can be well worth your while to add some international dividend exposure to the mix. This can be valuable for a few reasons, particularly stronger economic growth overseas as well as favorable exchange rate consequences. Many economies overseas have been experiencing higher rates of growth than the US and the dividend growth from some of the dividend payers in these economies is indicative of that.
Also, many of the emerging economies will experience an appreciation of their exchange rate versus the USD over time as their economies grow and attract additional investment. So investing in an international dividend stock from an emerging economy can not only give you higher organic rates of dividend growth, but you will also be able to ride an exchange rate tailwind over the years.
There are a few considerations to keep in mind with international dividend stocks. They typically only pay dividends once or twice a year, in contrast to the quarterly schedule that you get with US stocks. Also the tax consequences can be a little messy, particularly if the country doesn’t have a tax treaty with the US.
Mid Cap Investments
Mid cap dividends help to increase the overall dividend growth in your portfolio. Having some midcaps in provides a natural source of dividend replacement as dividend growth from the larger companies in your portfolio declines over time.
In fact, I expect that midcap and small cap dividend payors will make up an increasing portion of my dividend income and that they will still be at a stage of their business where dividend growth can continue for an extended period.
To be sure, mid cap and small cap dividend investment is a riskier play than looking at the larger more established dividend payers. This is why you want to set real limits in terms of how much dividend income you target from these players (my small caps dividends contribute about 15% of my dividend income).
Building up a dividend income stream takes time. The sooner you start putting money to work the quicker your get there.
I’ve heard it said that Einstein referred to compounding as the 8th wonder of the world. If so, its with good reason. The ability for individuals to grow their investments at progressively faster rates as each dollar gets reinvested is truly pretty amazing.
It also helps explain why the best time to start investing is as soon as you reasonably can. Compounding investment dollars at an early age can leave you with a significant amount of wealth later on in life.
An investor in The Coca-Cola Company who invested $10,000 about 50 years ago would have had a stock value of almost $500,000 today. If you think that’s impressive, consider the scenario where those dividend were reinvested. That same investor would have almost $1.75M in an investment in the Coca-Cola company!. Talk about an acceleration in wealth from compounding returns!
Similarly, if your are targeting a certain level of dividend income starting the pursuit of this early will give you many more years of dividend increases to get to that level of income. Going after a similar goal later in life will likely require a much larger capital investment to attain the same dividend goal, given that market yields will likely be much the same in future years as they are now.