Dividend stocks offer one of the most convenient ways to earn extra income while you sleep. All you have to do is select the dividend-paying stocks you want in your portfolio and watch those dividend deposits flow into your account. The best part is that you may qualify for an automatic dividend income increase without doing anything extra on your end.
Below, we’ll dive into a tried-and-true strategy to help you ramp up your dividend income for years to come.
Start earning dividend income
If you’re ready to jump-start your dividend journey, you’ll need to invest in companies that reward shareholders with dividends. Not every company does this, so you’ll have to do some quick research to make sure some of the companies on your watch list are dividend payers.
Here’s how it works. When a company earns money, they can do two things:
Reinvest the money back into the company
Reward shareholders with extra income
Some companies will do a bit of both. Take Microsoft (NASDAQ: MSFT), for instance. This trillion-dollar tech powerhouse continues to invest in its cloud business, while paying an annual dividend of $2.48 per share (as of June 2022) to shareholders. But if you want to earn your first $1,000 in dividends from Microsoft, you’ll need roughly 404 shares of stock. At Microsoft’s current share price, you’ll need to dole out six figures to make that happen.
That’s why you want to identify your goals and risk tolerance, and then research companies that align with that. If your goal is to invest in companies that raise their annual dividends every year, and you want to diversify your portfolio with companies beyond tech, you’ll want to direct your attention to a special breed of stocks. We’ll discuss that next.
Unlocking dividend growth opportunities
Some companies stick to the same annual dividend payment every year. Other companies have a track record of consistently increasing their dividends. These companies may be part of the Dividend Aristocrats or Dividend Kings club if they’ve been in the game for some time.
Dividend Aristocrats have proved their commitment to shareholders by delivering dividend increases every year for at least 25 consecutive years. Here are some examples of companies that have made it on the list:
Then there’s an elite group of dividend payers on the list that have paid and increased their base dividend for at least 50 consecutive years. Here’s a preview of the Dividend Kings:
Procter & Gamble
Johnson & Johnson
Growing your income while you sleep
Let’s say you invested in a company that has been crowned a Dividend Aristocrat. The company paid an annual dividend of $3.48 per share last year and plans to boost the amount to $3.65 per share this year. That may not seem like a big deal, but it all adds up.
If you have 1,000 shares of the company stock, you would have earned $3,480 last year. The dividend boost this year will bring you to $3,650. That means you earned an extra $170 without moving a muscle.
Imagine getting a dividend bump every year over the next 20 or 30 years. If the company continues to increase the annual dividend, your income will automatically increase, as long as you hang on to the stock.
Investing in dividend growth stocks can set you up for automatic pay raises for the rest of your life. Although past performance does not always guarantee future success, these companies have a proven track record that can help you get started on your journey.
Diversify your portfolio with dividend growth stocks
Setting up a dividend income growth strategy doesn’t mean you should abandon other types of stocks and investments. Dividends can fit into a well-diversified portfolio of assets that align with your goals and risk tolerance.
Start creating your watch list, do your research, and look out for companies that are growing their dividends. Those small dividend increases every year can lead to thousands of extra dollars over the long term. The best part is that you won’t have to lift a finger to earn your rewards.
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Charlene Rhinehart, CPA has positions in Caterpillar and Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.