Think back to when you were a kid and playing in the snow. Did you try rolling a snowball on ground to build a snowman (or woman!)? As the snowball rolled it picked up more snow becoming larger and larger.
Taking the same idea of rolling snowballs over to dividend investing, dividend reinvestment helps your future payments increase payment over payment.
If your investing strategy includes a receiving income from dividends, paying attention to how the dividend snowball works will help you progress towards your goal with enough time.
What is a dividend snowball?
The term dividend snowball is inspired by David Ramsey’s debt snowball method. With the debt snowball strategy, you prioritize paying off your debt by finishing the smallest balances first. And then you use that money towards your next debt balance.
In theory you pick up speed by reducing the number of accounts you need to pay rather than spreading your money across a bunch of minimum payments.
Technically dividend snowball investing is closer to compounding interest. If you leave your money in a savings account long enough, each interest payment increases slightly because you have a little more money in the account each month.
With a dividend snowball each dividend payment increases the number of shares you own. For the next dividend distribution you’ll receive a larger payment. With enough time invested in solid companies, the growth effect is amazing.
5 tips to increase your dividend income faster
Just like you want your snowball to grow faster, there are a few things you can do to help grow your dividend income. But remember you will still need to be patient as dividends are generally paid quarterly.
Buy stocks with histories of increasing their dividend payments
If you are focused on a dividend strategy, you’re already looking at the dividend payment histories of those stocks. The Dividend Aristocrats and Dividend Kings are two categories of stocks with long track records of annual increases (25+ years and 50+ years respectively).
While a future dividend payment is never guaranteed, companies that pay dividends usually follow the same patterns year over year.
As part of your stock research double check the annual percentage increase in the dividend payment. For certain stocks that few pennies per quarter will represent a healthy percentage increase and for others it barely moves the needle.
Don’t chase dividend yield in your strategy as you may get burned by dividend cuts! But it will take you longer to grow your portfolio with stocks that have “frozen” dividends or ones that barely increase their payments year over year.
Reinvest your dividend payments automatically
If you don’t need the cash yet to buy bills or for other uses, consider setting your dividends to automatically reinvest when they’re paid.
Keeping with the snowball analogy, with each reinvestment of the dividend payment your number of shares grows slightly. Each future dividend payment will increase simply because you have more shares eligible for a dividend payout.
With enough time that payment increase gets larger and larger.
Up until recently the large brokerage houses were charging trading commission fees so you would have lost money by selectively reinvesting the money. Even with the commission down to $0, you still need to buy full shares. You may not be able to reinvest all of the cash if you do it yourself. With automate reinvestment your cash is exchanged for shares including fractional ones.
Don’t forget to set your dividends payments to reinvest
Assuming you decided to automatically reinvest your dividends, don’t forget to make sure your account is actually set to do that.
Depending on how your account was setup, it may not reinvest your dividends. You might just receive the cash payment instead.
I’ve had mixed results with this honestly so double check your settings each time you buy a new stock to make sure you don’t miss a reinvestment. The closer you buy a new stock to the ex-dividend date you might have trouble checking the setting.
Or you could also check your overall account settings to ensure all stocks default to reinvestment instead of staying in cash.
Buy more shares when you have cash available
While reinvestment helps you grow your shares, it takes a long time (YEARS) to increase your overall stock holding. When you have the extra cash available consider buying new shares in the stock.
At any point in a time a great stock might not be the best value to buy. For example if the stock is trading close to its 52 week high, you might be able to get more for your money by buying a different stock. If the stock is trading closer to it’s 52 week low, and the company is still worth holding onto, buying new shares will be bought at a deal price.
Make sure you double check your research before adding more shares in an existing to make sure the company continues to be healthy and the dividend is still safe. As a buy-and-hold investor, we sometimes are more tolerant of rough times than investors looking at more short term results.
Avoid moving your stock between brokerage companies
When you move your account to a different brokerage company they transfer the whole shares you own, not the partial shares.
This was something I learned the hard way a long time ago. If you’re early in your dividend investment strategy you may not have enough partial shares to create a whole new share. When you move your account to a new brokerage company you’ll need to start over with building partial shares towards a whole share.
That realization will be frustration. Either avoid moving your portfolio between companies or make sure you’re investing enough in a stock to earn at least one new share a year. It will be an estimate but a good goal to aim for.
Wrapping up. What other tips to you have for increasing your dividend income?
Compounding dividend payments into larger payments for the future is a great way to earn passive income. With a few simple strategies you can increase your dividend income faster. Who doesn’t love a snowball of money that can grow on it’s own?
What other strategies and tactics are you using to increase your dividend income?
More Dividend Investing Ideas
- 3 things I wish I knew before I started dividend stock investing
- 6 dividend investing mistakes to avoid when you start
- 4 places to start looking for dividend stock ideas to build your portfolio
- Simple Dividend Calculator Spreadsheet
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