2024 Income Dividends

The Motley Fool

3 steps to increase income from dividend shares in 2024
Dividend shares have long been a powerful tool for generating passive income. But with 2023 coming to a close, many investors are now looking for new ways to bolster this income stream. There are various ways to achieve this, and not all of them require injecting more capital into the stock market. Let’s take a look.

1. Set an income goal
The first step is to look at what a portfolio is already generating in terms of yield. On average, the FTSE 100 delivers around a 4% yield. But depending on the strategy an investor is following, this income stream could be higher or lower.

Let’s assume a portfolio contains a blend of income and growth stocks, subsequently resulting in an overall yield of 3%. With that number at hand, investors can now pick a new target pay out. For this example, let’s say an investor wants to boost this yield to 5% in 2024. What should be the next step?

2. Portfolio rebalancing
Not every household has the luxury of earning excess cash right now. After all, the cost-of-living crisis is ongoing for many, and the economic conditions are far from ideal. However, it’s still possible to source some capital by reorganising what’s already in an investment portfolio.

If dividends are the goal, then perhaps it may be worth examining growth-oriented positions. A review of each company could reveal a broken investment thesis. Or perhaps firms may simply not be living up to previous expectations. As such, investors need to decide whether an opportunity cost exists. In other words, while dividends may deliver lower returns, are they a more reliable way to grow wealth?

Dividend shares should also be looked at under a microscope. There are hundreds of income shares on the London Stock Exchange, and not all of them are worth owning. Higher-yielding opportunities could be hiding in plain sight, and simply swapping out underwhelming shares for superior ones could help push a passive income stream to new heights. Of course, the question then becomes: how do investors find these superior opportunities?

3. Identify the best income shares
All too often, income investors become fixated on the yield that a stock is offering. Yet in practice, this can lead to critical errors. While exceptional, there are multiple stocks in the FTSE 350 that are currently offering a sustainable dividend yield of around 10%.

At first glance, they sound like bargain buying opportunities if shareholder pay outs can indeed be maintained. However, in most cases, these yields are being driven by a rapidly falling stock price due to rising concerns about the long-term outlook. Therefore, while dividends are chunky, the continued decay of the share price offsets any gains made, resulting in the destruction of wealth despite passive income increasing.

One example of this is, in my opinion, British American Tobacco. With health regulations worldwide becoming increasingly strict, the future of the cigarette market looks bleak at best. And even the management team agrees. That’s why the firm is rapidly accelerating its transition to non-combustible products, but whether it can do so fast enough has yet to be seen.

In short, investors targeting a higher portfolio yield need to look beyond shareholder pay outs of attractive income shares. Only then can a tremendous income opportunity be discovered.

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