How To Double Your Dividend Income, The Easy Way
There is a well-known way you can stretch your investment — even if it starts as a single share — to where it can more than provide for any needs you might have in retirement.
So how can you make your holding — no matter how small initially — turn into something that you can actually afford to live on?
Simple: Reinvest dividends.
Now, I’ve preached the value of reinvesting dividends before. But this is so important that it bears repeating.
Also, one of the most common responses I get from readers when I talk about this is that they don’t have enough time. I get it… Some of you need all your dividend cash right now. But if you don’t need to live off your dividends right away, reinvesting them can be a much better way to create a lasting (and growing) stream of income.
The good news is that, while you need to understand that this will take some time, it might not take as much as you think.
Let me explain…
How To Double Your Income Over Time
Dividends are one of the most powerful wealth-building tools in an investor’s arsenal thanks to the power of compounding.
By reinvesting your dividend checks (instead of cashing them), you can buy more shares, which leads to even larger dividend checks. These larger checks can then be used to buy even more shares, and so on. In time, even a small stake in such stocks can grow into a tidy sum.
Let’s say you invested $20,000 in a fund that pays a 7% annual dividend yield.
If you did not reinvest and simply pocketed the dividends every time they were paid out, you’d collect a flat $1,400 in dividends per year (7% of $20,000 = $1,400).
But let’s say you had time to reinvest your dividends on this investment for the next several years before you needed to live on the income. If you were to reinvest your dividends for five years, you could start collecting $1,964 in dividend income per year starting in year five. That’s like earning 10% interest per year on your original investment ($1,964/$20,000).
It gets better. If you reinvested your dividends for 10 years, you could begin collecting $2,754 per year in dividend income by year 10 if you needed the cash. That’s like earning an eye-popping 14% in cash interest per year on your original investment ($2,754/$20,000).
Let’s put this another way to drive the point home. By choosing to patiently reinvest your dividends over 10 years instead of pocketing them every time, you could earn twice as much dividend income per year ($2,754 annually versus a flat $1,400 annually) in this example. And that’s without needing to add a penny to your original $20,000 investment.
I don’t know about you, but I’d take that easy trade off if it meant doubling my annual income. And remember, we’re not even taking into account any dividend raises, share price appreciation, or any additional capital invested.
The Takeaway
Few long-term investors take the simple steps to do this. But it can have one of the most significant impacts on the overall performance of your portfolio.
The great news: reinvesting your dividends is easy. In fact, many brokers (online or in-office) will set this up for you when you start investing by default. If that’s not the case and you’re receiving dividend checks that you want to start reinvesting, just give your broker a call and they can take care of it for you in a matter of seconds.
It doesn’t take Warren Buffett to see how quickly your income stream can grow when you invest this way. The secret to lasting retirement income is simple: The more you reinvest your dividends and the longer you do it, the larger the dividend checks you can collect when you need to finally “turn off” your reinvestment plan and start living on the income.
For several years now, my subscribers over at High-Yield Investing have been using my picks and reinvesting dividends. As a result, they now have powerful portfolios that throw off thousands of dollars in extra income when they need it most. All it takes is careful research of the best income-paying securities on the market — and a little patience and discipline.