If you've invested in the stock market, or any other asset class, you've likely experienced some volatility. Ups and downs are generally an unavoidable part of investing, and they can be particularly irritating to those aiming to realise passive income from S&P/ASX 200 Index (ASX: XJO) dividend stocks.
Fortunately, if the market's turbulence has you feeling queasy, you can take measures to stabilise both your portfolio and your dividends.
3 steps I'd take to protect my dividend income from volatility
Diversification
One of the simplest and most effective ways to protect a portfolio from volatility is to diversify.
For those seeking stable dividend income from ASX 200 shares, that likely means buying a large handful of stocks operating in various sectors.
That way, your income stream can be protected if a single company or those across a single sector were to lower their dividends. It also means you might be positioned to make the most of an isolated upwards tick.
Defensive dividends
On top of diversification, one can help guard against volatility by seeking out ASX 200 shares with defensive qualities.
Defensive companies typically offer a product or service that their customers can't easily do without.
That means they likely won't see their earnings markedly tumble in tough times. Of course, robust earnings are good news for those seeking dividend income.
Woolworths Group Ltd (ASX: WOW) and Transurban Group Ltd (ASX: TCL) are examples of defensive ASX 200 shares. Australians likely won't stop shopping at supermarkets or driving on toll roads no matter the economic environment. Not to mention, both companies boast a degree of pricing power.
Delve deep
Finally, considering the ins and outs of a company's finances might help an investor identify more secure sources of dividend income. That means delving into the balance sheets of potential investments.
ASX 200 dividends usually represent a portion of a company's free cash flow – that which it doesn't need. Thus, if a company has a multitude of debt to service or its earnings are sporadic, its dividends might be a risk.
Those are just two examples of red flags a potential investor might find on a company's balance sheet. But what about green flags?
I think a consistent earnings stream and manageable debt levels can represent a green flag for investors looking for dividend income.
I also like to consider a company's dividend history. If it's historically grown its offering, it's probably a good sign that management prioritises shareholder payouts. Though, past performance isn't an indication of future performance.
