Three Ways to Increase Passive Income with Dividend Stocks

Motley Fool Singapore Bureau, posted May 27, 2019

Generating passive income with dividend stocks is a strategy worth considering for many investors.

Dividends can supplement retirees' income.

However, earning passive income that grows faster than inflation may be difficult.

Here are three easy ways to grow passive income over the long term.

Dividend Growth

Many dividend stock investors may think a high dividend yield is important, but dividend growth matters more.

Due to compounding, a company that maintains a high growth rate in the long term can generate greater returns than one with a high yield but a low growth rate.

Therefore, you should focus on stocks with expected substantial earnings growth and not highly payout-friendly (low payout ratio).

For these stocks, future dividend increases are likely, which can lead to long-term income growth for investors.

Dividend Track Record

Past performance is not a guarantee of future results, but companies with a dividend track record are less likely to cut dividends in the future.

This is because they tend to be in stable industries or have solid financials.

Annual reports of various listed companies around the world are available online, making it easy for investors to research dividend track records.

Additionally, annual reports provide information on past dividend policies, which may give insights into future dividend growth prospects.

Small and Medium Enterprises

Many investors focus on quality stocks when considering dividend-based passive income, but it may be worthwhile to consider small and medium-sized enterprises (SMEs).

SMEs can be less stable and riskier than large peers, but they often have significant room to grow within their industry, potentially delivering high dividend growth rates.

If investors own and diversify many SMEs to reduce risk, owning SME stocks may offer benefits.

In other words, you can enjoy both growth in distributions and capital gains.