If passive income is good, then more passive income must be all the better, right?
There are two ways investors primarily increase their passive income. They can either put more cash to work or invest in securities with a higher dividend yield.
The problem with big yields is, on the whole, they’re more risky. That doesn’t necessarily mean your favourite high-yield stock is about to cut its payout — in fact, many stocks paying anywhere from 5% to 9% dividends have safe payouts — but the general relationship is true. Besides, a bigger yield usually means less cash to reinvest back in the business, which hampers growth.
There is one method investors can use to increase the income they get from certain stocks, although, at first glance, promised increases of between 2% and 5% don’t seem like a lot. But this can really add up over the long term and has the advantage of further automating your investments.
Let’s take a closer look at how you can increase your income with very little work.
Embrace the DRIP
Dividend-reinvestment plans (or DRIPs, as they are often called) are a simple way for investors to both increase their income and simplify their portfolios.
Here’s how they work. Instead of getting your dividend as cash, you elect to receive the payout in the form of more shares. This frees up cash the company can use to expand, improve the balance sheet, or put to work in a million other ways.
In exchange for this sacrifice, the underlying company will give you a little sweetener. This is usually in the form of a small discount on the new shares you’re about to get. That discount is usually in the 2-5% range, with many settling in at 3%.
Signing up for this program is as simple as contacting your brokerage and asking to sign up. You don’t even have to go that far most of the time; they’ll usually let you pick and choose any DRIP-eligible securities online.
A real-life example
There are dozens of Canadian dividend payers that let investors participate in such a program. Let’s take a closer look at one of the biggest: Inter Pipeline (TSX:IPL).
Inter Pipeline is one of Canada’s largest oil services companies. Major assets include three major pipelines transporting bitumen from the oil sands, conventional oil pipelines in central Alberta, natural gas liquid processing facilities, and fuel storage terminals. The company is also building the Heartland Petrochemical Complex, which will produce various resins used to manufacture a variety of products.
Inter’s generous dividend is a main reason why many people own the stock, myself included. The payout is $0.1425 per month, which works out to a cash yield of 7.58%. The company has also raised the payout each year for the past decade, with average growth a little higher than 7% annually. Investors shouldn’t expect much dividend growth until Heartland is finished in late 2021, but with a payout ratio in the 80% range, Inter Pipeline can afford a couple small dividend raises to keep the annual streak alive.
The easy way to get a nice boost on your Inter Pipeline dividends is to sign up for the DRIP, which gives investors a 3% bonus to get their dividends in the form of new shares. This bonus boosts the dividend yield from 7.58% today to 7.96%.
That might not seem like a lot, but the results can add up over time. $10,000 invested in the stock today returning 7.58% annually over 30 years would be worth a little over $89,000. The same amount invested returning 7.96% would be worth $99,514. One simple decision can add up to $10,000 extra over an investing lifetime.
Now, imagine how much extra you’ll end up with loading your whole portfolio with stocks like this one.
The bottom line
Dividend-reinvestment programs are an easy way to supercharge your passive-income stream, especially if you’re nowhere close to retirement age. The results can really add up over time.
