In this blogpost I’m going to show you exactly how to build a solid diving stock portfolio step by step. We’re going to cover everything you need to know.
When it comes to investing in dividend, stocks I’ll show you all the things you need to know to build a high quality dividend portfolio today.
Let’s get started! Okay so first of all what is a dividend stock?
What is a Dividend Stock?
A dividend stock is a stock or company that pays some of its earnings to shareholders. Investors earn money by simply holding shares of a dividend-paying company and when you do this this results in passive income to you as the shareholder.
Different stocks are usually going to be well-established companies with a track record of distributing earnings back to shareholders and that leads us to the question.
How do dividend stocks work?
If you buy a hundred shares of a company and you’re paying ten dollars per share. This means you’re spending a thousand dollars in total for those hundred shares. Now let’s say this, company pays out fifty cents worth of dividends per share that you own.
So, if you invest one thousand dollars, you’re going to receive fifty dollars for that year. That results in a five percent dividend yield that fifty dollars is basically your dividend payment or the passive income you are making from holding that stock.
Why would someone want to build a dividend portfolio?
One of the biggest things is, of course you get regular income so instead of relying on the appreciation of price for a stock. There’s not safety net in that you are actually receiving payments for just owning that stock. you also have more safety and stability. Dividend portfolios are historically proven to be more stable than the market itself.
Equity portfolios have their own risks, so you know in uncertain markets. There’s volatility, that’s when having a dividend portfolio can make a lot of sense. It also allows you to balance resistance to inflation as well as market fluctuations. So, by investing in these dividend-paying solid blue chip companies that provide reliable income.
That’s just another sense of diversification now let’s talk about some of the pros of dividend.
Pros of Dividend Stock Portfolio
1. Passive income
You are able to make money without doing any work. This is arguably the most passive form of income because you don’t need to spend any time. You know keeping your business up to date or anything like that, all you need to do is buy the stock, hold it and you’ll get paid out.
2. Beats the market
The return on dividend stocks is actually greater than the average return from the market, if you do factor in those dividend payments. It also allows you to reduce risk and volatility. So, dividend stocks they grow a little bit slower but they’re also less volatile and you won’t lose money as quickly during bear markets. There’s also tax advantages. These dividend payments are taxed at lower rates than your ordinary income and that’s because the payments that you’re getting they’re likely going to be qualified dividends which include those dividends paid out by U.S. companies and those are going to be taxed at long-term capital gains rates
On the other hand, you have non-qualified or ordinary dividends such as those paid by real estate investment trusts. Those are actually taxed at regular income so yeah there is a big benefit to holding dividend stocks.
3. Compound returns
You also get compound returns right so when you get that dividend payment you can actually reinvest that money back into that given stock and buy more of it. From there on you’re going to receive more dividends. So, you kind of compound and see that exponential growth that way in bear markets or when there are big corrections sort of like right now.
4. Beat most other stocks in a bear market
Dividend stocks actually tend to beat out those high growth stocks that traditionally fall during those times. Now we talked about the pros of investing let’s also talk about some of the cons.
Cons of Dividend Stock Portfolio
1. Less growth
There is probably less growth. Dividend companies take profits and they distribute those two shareholders. When they do that that means they actually have less profit remaining to reinvest into their business That’s one big reason why dividend stocks tend to grow slowly in terms of their price.
There’s just less money for those companies to reinvest back in themselves. But of course, the trade-off is that some of that money actually goes to investors. That’s why we like these types of stocks.
2. Dividends are never guaranteed
Dividends are also never guaranteed. So companies, they can actually temporarily suspend or eliminate dividends altogether if they are struggling financially.
3. Dividends are not diversified
If we’re looking at dividend ETFs, those are also not as diversified as some of the other big index funds. That’s because they tend to be large caps. So, you are missing out on a lot of those medium two small cap companies.
Here’s some examples of some very popular dividend stocks, that a lot of people invest in you’ve probably heard of most of these names but always pay a relatively high dividends.
- Exon Mobil
- Wells Fargo
- American Express
Compared to most of the other companies that exist in the world now.
The Process to Build a Dividend Stock Portfolio
Let’s get into the process of starting your own dividend portfolio we’ll get into each of these steps in more detail:
- Open up a Brokerage account
- Deposit money
- Choose investments
- Buy investments
1. Open up a Brokerage account
I’ll actually show you guys what the whole signup process looks like if you want to sign up for Webull. Going to look like right now you’ll see, when you open and fund a new account so you can click here and you’re gonna enter in your phone number as well as the verification code that is sent to your phone super simple the whole signup.
Process takes a few minutes and. Webull is a really great app that I’ve been using for a long time.
If you guys want to create a robinhood account they are giving one free stock when you use the link down below and this is what the page is going to look like.
They’ll have you enter in your first name, your last name, your email address as well as your password that’s gonna take you through the standard brokerage signup process.
Lastly we have moomoo, this is another really great app that I’ve been working with long term you’ll get five free stocks.
When you open up an account and make your deposit. If you actually deposit a hundred dollars or more, you’ll get an extra share of lucid stock which is pretty amazing. So ,you’ll click here open account and it’s gonna have you enter in your email as well as your password .
To sign up, really the platform you choose does not matter that much because the process of buying shares is going to be the same on all of them. There are tons of other brokerage platforms out there but the three that I showed you, they’ll actually give you those free stocks when you sign up so
Safety is the #1 Priority
All these apps make it very very easy for you to actually start buying stocks. Now, when it comes to investing. Safety is going to be one of your biggest priorities.
- Invest an amount of money that you are willing to lose 100%. The chances of you actually losing all your money. With you know traditional stock trading like this is very very low. So, as long as you’re not trading options you should be fine but just a heads up you’ll also want to do
- Do your due diligence before investing in anything. I recommend doing is one hour of research per company you’re interested in and just make sure that the risk of buying that company matches your risk tolerance.
- Develop your own rules, guidelines or boundaries for investing
- Just stay consistent with those rules. Don’t trade based on impulses or emotions and that’s going to result in you having a higher chance of succeeding in the market.
Here’s some other things to consider. These are some key metrics that we’ll be going over more in detail but they include the 10-year average return dividend yield diversification cost of owning ETF.
The expense ratio the, total return as well as earnings per share EPS. The 10-year average return is the percentage used when reporting the historical return of a mutual fund, specifically the 10-year average return reports the average return of an asset for the past decade.
10-Year Average return
This can be really helpful in assessing the long-term value and profitability of an asset. We can do so you can actually stack these 10-year average returns on top of each other. When you do that, it’s going to showcase the profitability of an asset over several decades.
Dividend yield is another really important key metric that we’ve already talked about, but this is the amount of money a company pays shareholders for owning a share of its stock divide by its current stock price and like I mentioned earlier.
Even though it’s better to of course receive higher dividends. Don’t get fooled by insanely high dividend stocks right. Those ones that pay you know 20 to 60 dividend yield, those are going to be called dividend traps. Those are probably not going to be the best companies to invest in as they just mean that the company is giving away way too much money to shareholders and not reinvesting that money into its own growth.
More important is the company’s ability to maintain and slash or increase their dividend payouts. Another really important term is diversification. You definitely want to practice distributing your investments to many assets so that your exposure to any one type of asset or even one sector is limited.
The main objective with this is that you want to reduce your portfolio volatility over time and this can actually be measured by examining the correlation coefficient of a portfolio. You can see that this is an example of a pretty well diversified portfolio. You have six different types of investments and they are spread out pretty evenly.
- Local Market Equities
- Developed market Equities
- Emerging Market Equities
- Real Estate Investment Funds
- Government Bonds
- Index-Linked Funds
Cost of owning ETF
How much does it cost to actually you know invest in this fund so the expense ratio. While this is not like the biggest factor to consider. This only applies for dividend ETFs or other types of ETFs. It’s not going to apply for your individual dividend stocks.
I’m a really big ETF person. I think that that’s probably the best way for most people to invest in all types of stocks. Of course you’re going to care about the expense ratio because that’s how much you’re paying basically in management fees.
In my opinion anything under 0.1 percent is relatively good and anything above that is going to be a little bit more on the expensive side. Just be aware because a lot of your growth in your portfolio can get eaten up by these fees. So, that’s why of course it always makes sense to choose ones that have the lowest fees possible.
Now the key term is total return. The increase in stock price, which is known as capital gains plus any dividends paid the company whose shares delivers strong returns results in more profits. That also results in greater dividend payouts and finally earnings per share eps. This actually allows you to normalize the company’s earnings to a per share value companies
Earning per Share (EPS)
That show their ability to regularly increase earnings per share over time are going to be solid dividend stocks. That are more reliable and we can do is compare the eps for a company’s respective sector with both the company itself as well as its biggest competitors.
Setting up your Portfolio
When it comes to setting up your portfolio, there are some things that you definitely shouldn’t do.
We’ll get into each of these in more detail. They include:
- Buying good stocks.
- Targeting several industries.
- Caring about financial stability over growth.
- Modest payout ratios.
- History of rising dividends.
- Reinvest your dividends if you want to take advantage of higher compound growth.
History of Rising Dividends
Another thing to look at is the history of rising dividends. So some really good sources, that you guys can use to find these rising dividend stocks are dividend aristocrats, dividend achievers and the value line investment survey. Basically companies that raise their dividends steadily over time are more reliable and durable.
If they have a good history of paying out dividends on time and increasing them. Then we can reasonably expect these companies to continue growing their dividends throughout the future.
The last one reinvest dividends, this is more aimed at you, the investor and what I would recommend is if you don’t need that money right now to live, actually just reinvest it back into that company especially if you are a believer of it. This is going to lead to higher compounding growth. As you guys have probably heard results in the biggest increases in net worth for people.
Dividend investment strategies
We have three dividend investment strategies in particular:
1. Dividend growth investing
Investing in dividend companies that experience growth year over year. This is pretty optimal because you’re getting a dividend payment. You’re also investing in the company that you know is also growing itself. Therefore, the share price is also going up so you’re making money from appreciation as well as those continuous dividend payments obviously. This is the optimal investing strategy.
2.Dividend capture investing
This is more inefficient and more risky and it’s basically an income focused stock trading strategy. Where you hold stocks long enough to get the dividend payout and then sell them a lot of times. These stocks actually correct for themselves so yeah it’s hard to make this work. It is more risky.
Just buying more shares with your dividends to add extra compound interest long term on the focus.
I think this is something that a lot of beginners fall into. They see a company with like 20 to 60 dividend yields. They’re like of course why should I buy something else with like a three percent dividend yield when i can buy this with a 60 dividend yield.
The fact is that companies with poor financial and business fundamentals tend to have these high yields and oftentimes they cannot sustain those listed dividend yields for any long period of time. So to actually analyze these dividend traps, you’ll want to look at the price to earnings ratio, free cash flow and debt to equity ratio.
The price earnings ratio is something that helps you determine whether a company is overvalued. Generally, the higher the Price-To-Earnings ratio, the more expensive a stock is relative to its earnings. You absolutely cannot use just a stock’s price to determine if it’s worth it.
Not instead focus on things like the P-E ratio because this actually allows you to compare it to other companies in the industry to better determine value.
For example, you have a company that’s trading at $100 and the earnings per share is $5.
$100 divided by $5 is going to be 20 and that is your Price-To-Earnings Ratio.
Free Cash Flow
Free cash flow is the money that companies can use to pay out dividends make acquisitions and buy back shares. It’s really good if a company generates more free cash flow than dividend payments and if a company pays out more in dividends than it generates in free cash flow. Then it may not be able to sustain dividend payments for a long time.
|Free Cash Flow(FCF) = Cash from Operations-Capital Expenditures|
Debt to Equity Ratio
Debt to equity ratio is how much of a company’s funds are from debt versus from shareholder equity. Generally it’s going to be considered more risky if a company has more funds from debt than shareholder equity. In that case, investors might have their dividends cut if the company runs into financial problems or if it’s heading towards bankruptcy.
|Debt Equity Ratio (D/E)= Short Term Debt+ Long Term Debt + Other Fixed Payments / Shareholder’s Equity|
Some last things to remember
Here are some of the last things that you guys should remember
- Dividend investing is better as a long-term sustainable source of passive income and not a short-term money-making scheme. You’re not going to get rich often investing. That’s impossible rather when you’re doing this type of investing.
- You’re just trying to get a steady paycheck from your stocks and this continues to build up over time and you can actually take that money and live off of it or you can reinvest it back into those shares or into other companies.
- For most people dividend investing is not going to be their main source of income. After a long time you might be able to build up a very significant dividend portfolio that pays out enough money for you to actually live on.
For example, let’s say you have a one million dollar given portfolio with an average dividend yield o three percent. This means that you’ll get pretty much guaranteed thirty thousand dollars every single year from those payments.
While the total net value of your dividend portfolio might not go up as much as another one of your growth portfolios. You do get that sustained payment from the dividends which is really nice to have.
That’s it for this blogpost. I hope you guys found it useful and you know with everything going on right now. Given stocks are becoming more and more popular .You’ve seen higher growth tech stocks and the s p 500 really go down in the last half year. At the same time, a lot of these dividend stocks have really held their value quite well as well as continued to pay out those dividend payments.
Overall, great way to invest shouldn’t be everything that you invest but it can be a good way to diversify your portfolio like I mentioned. I make a ton of content about personal finance investing and entrepreneurship
Thank you so much for your time .