Generating passive income from dividend stocks has become tricky. Stock prices have surged so much that the stock market average dividend yield has dropped. In fact, the trailing dividend yield on the TSX Composite Index is just 2.44%. Meanwhile, inflation is roughly twice as high. In other words, your passive-income strategy is eroding purchasing power.
To keep up with the rising cost of living, you need to switch your strategy and boost your passive income. Here are three strategies that could help you rapidly double your passive income in 2022.
Pivot to high yields
Simply switching to another stock in another sector can double your dividend yield. For instance, if you hold a major bank stock, you can expect to earn roughly 3% in annual dividends. However, if you dig deeper into the financial sector and find a niche stock like Atrium Mortgage Investment (TSX:AI), your passive income jumps to 6.34%.
Atrium focuses exclusively on mortgage lending. That’s the most profitable and reliable segment of the big banks’ earnings, too. However, Atrium’s business is organized as an investment trust, which means investors can expect a bigger chunk of annual cash flow delivered to them as dividends.
Atrium stock is also overlooked, which is why the valuation is much lower. While the average bank trades at a price-to-book (P/B) ratio of two, Atrium’s P/B ratio is 1.3. That’s part of the reason why the dividend yield is so high.
Bet on dividend growth
Another way to boost your passive income is to focus on companies that can afford to significantly raise their dividends. Some sectors are more cyclical, which means earnings jump rapidly when the economic climate is favourable. This can lead to special dividends and bonuses for shareholders.
In 2022, the rapid rise in oil and gas prices could make oil stocks an ideal buy. A bull market in gold or commodities could also make miners an ideal target. However, my bet is on Alimentation Couche-Tard (TSX:ATD).
The company’s cash flows in recent years have been robust. But shareholders haven’t seen much of this cash. In fact, the dividend-payout ratio is just 11%. The company has been reserving cash for a potential acquisition deal. But after years of looking, if a deal isn’t struck soon, the management team could be under pressure to give some of this cash back to shareholders. A special dividend cannot be ruled out, in my view.
Systematic withdrawal plan
The easiest and most practical way to double your passive income is to implement a systematic withdrawal plan. Most major banks and investment management platforms offer this feature. It basically allows you to take profits on capital appreciation every year.
For instance, if you own a stock that pays a 2% dividend and can reasonably expect to grow 4% every year, you can sell 2% of you holdings every year without draining capital. That doubles your passive income. It also helps you preserve or expend wealth over time, so long as your withdrawal isn’t too big.
Bottom line
These three strategies can enhance your passive income in 2022. Good luck!
