Following heightened economic uncertainty in recent weeks, ASX investors may be looking for ways to boost passive income.
It's no secret that ASX investors love dividends.
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Dividend investing especially popular among Australian Investors
Dividend investments have always been a popular option for retirees as a source of passive income. Increasingly, younger Australians have also sought to build a portfolio of dividend investments to generate additional income. This has allowed them to offset higher living costs and keep pace with inflationary trends. Investing in companies that pay high dividends also provides considerable tax advantages due to the franking credits system that currently operates in Australia.
Dividends are typically paid to shareholders by established companies with stable and sizeable cash flows. In Australia, large mining companies such as BHP Group Ltd (ASX: BHP), banks such as Commonwealth Bank of Australia (ASX: CBA), and retailers such as Wesfarmers Ltd (ASX: WES) are most known for their high dividend yields.
However, by limiting their investing universe to these companies, ASX investors may be missing out on substantial opportunities.
What are 'homemade dividends'?
Instead of focusing only on companies with high yields, investors can create passive income through homemade dividends.
Homemade dividends refer to a form of investment income whereby investors raise cash by selling a percentage of their share portfolio. This allows investors to proactively boost passive income instead of relying on a company's dividend yield. They can also control the timing and amount of funds in their pocket.
Those willing to adopt this approach can invest in any company on the ASX, not just those with big dividend yields.
Using 'homemade dividends' to boost passive income today
This week, gold surpassed the Magnificent Seven as the most crowded trade on Wall Street. The precious metal reached a record high of US$3300, following geopolitical tensions, US-China trade conflict, and an uncertain economic outlook. According to a recently published Bank of America survey, nearly half of the fund managers surveyed expect gold to continue to outperform.
There are several exchange-traded funds (ETFs) that allow investors to invest in gold. For example, Global X Physical Gold ETF (ASX: GOLD) and BetaShares Gold Bullion ETF (ASX: QAU).
But, these ETFs do not pay a dividend. This may preclude many investors targeting a certain level of passive income from investing. However, by selling a portion of the ETF periodically, they can mimic a dividend and control the flow of cash into their pocket.
By embracing homemade dividends, ASX investors can also buy companies with lower dividend yields. Specifically, they can elect to sell a portion of shares periodically to fund the difference between the yield offered and the yield they desire.
This may lift the appeal of companies such as Washington Soul H Pattinson Company (ASX: SOL). While Soul Patts offers a relatively modest yield of 2.7%, its share price has climbed more than 90% over the past 5 years. It has also held up relatively well this year, with its share price up 6% for the year to date.
Foolish takeaway
Australian investors typically seek out companies with high dividend yields to boost their passive income. However, by limiting themselves to this strategy, they shrink their investment universe to a pool of large, slow-growing companies. Embracing homemade dividends can provide investors with greater opportunities, ultimately boosting their overall wealth.
