Building a dividend stock portfolio that provides a steady stream of income is a goal of many investors. But to achieve that goal you need to understand what kind of investor you are and build a dividend investing strategy to help you achieve your goals.
Maybe you need a dividend portfolio for monthly income, of maybe you are comfortable with quarterly dividend income payments every three months like March, June, September, and December.
Far too often when trying to build a dividend stock portfolio, investors will reach for the higher dividend yields without fully analyzing if the dividend payout is safe. There is nothing worse than watching a stock price drop when a business reduces its dividend to shareholders.
Regardless of your dividend investing strategy and the kind of dividend stock portfolio you are trying to build there are some basic recommendations we have about dividend investing. We strongly recommend only investing in businesses that meet all the following six criteria:
What of dividend investor are you? Before deciding what kind of dividend paying stocks to put in your dividend stock portfolio you need to ask yourself what kind of investor you are, to determine the kinds of stocks to look for as you build your dividend portfolio.
This type of investor is likely aged 45 and over. With interest rates so low, they are looking to invest in safe, higher yield stocks.
They will accept businesses that pay a quarterly dividend but would prefer to build a portfolio for monthly income dividend payers. Ideally, they would have a monthly dividend portfolio that would generate income in each month of the year.
This type of investor will take investment advice from many sources, but ultimately, they want most of their total return to be in the form of a steady stream of dividend payments, with a little stock price appreciation as a kicker.
Likely this investor would want to invest in utilities, real estate investments like real estate investment trusts and other select blue chip dividend payers.
We would specifically recommend staying away from high dividend paying industries like tobacco, telecom as well as oil and gas companies. These industries tend to be slow to no growth and/or highly leveraged, making them riskier for dividend seekers. Do not be attracted to their high yields, as they are not as safe as they may first look.
Here are several examples of higher quality dividend paying stocks with higher yields that are worth your consideration right now:
First Energy Corporation
First Energy is an electric utility holding company serving approximately 6 million customers in portions of Ohio, Pennsylvania, West Virginia, Maryland, New Jersey, and New York.
It has a well-covered dividend yield of approximately 5%. It is trading at approximately 12 times 2021 earnings estimates at a time when the utility index as a whole is trading at a much higher multiple.
An investor could be able to generate a total return of 10% per year from First Energy through a combination of its 5% yield plus a price appreciation of another 5% from increased earnings per share each year.
Like all utilities, First Energy is not going to product multi-bagger returns quickly like Tesla, or Shopify, but it should generate solid returns over the long run.
Like utilities discussed above, real estate investment trusts tend to pay high dividends that make them attractive to investors seeking a large part of their total return coming from current income.
WP Carey is a blue-chip real estate investment trust with a long track record of paying and increasing its dividend to shareholders.
They invest in a diversified portfolio of real estate assets and are geographically diversified between the United States and Europe.
WP Carey appears to have successfully navigated the uncertainty caused by COVID 19. With its strict underwriting criteria is has been able to collect between 98% and 99% of its rents due from tenants during most of 2020.
WP Carey has grown its dividend each of the last 21 years and has a current yield of approximately 6.2% that looks secure.
Like First Energy above, investors should be able to achieve a 10%+ return with WP Carey through a combination of its 6% yield, plus some annual price appreciation.
This type of investor needs less current income, so they are willing to invest in a stock that pays a lower dividend today, as long as that company is growing its earnings and dividends quickly. Holding this type of stock for a long period of time through your wage earnings years will reward you nicely with stock price appreciation during your working years and payoff with a nice dividend in the later years as you get closer to retirement
Here are two examples of high-quality businesses that have a low current yield now but are growing earnings and dividends quickly each year.
VISA and Mastercard
Visa and Mastercard are two of the best known brands in the world. Anyone reading this article likely has either a debit card or credit card from one of these great companies.
They own two of the largest electronic payment processing networks in the world at a time when less and less people are transacting business with actual cash. We see the war on using cash as a megatrend that is still in the early stages, with both VISA and Mastercard having large moats to protect and grow their business.
Remember that VISA and Mastercard are just processing payments, so they are taking no credit risk. As such, their profits have been steadily on the rise over the last 20 years. Yes, COVID 19 did slow both companies down in 2020, but we see this as a temporary setback.
Both VISA and Mastercard are very generous with returning cash to their shareholders. They both are well known for increasing their dividends by 15% to 20% per year, and even during a difficult 2020, they each announced dividend increases in the 8% to 10% range.
Building a dividend portfolio of high-quality stocks is a goal of many investors.
But first you need to know what kind of investor you are to come up with the right dividend investing strategy as you build your dividend stock portfolio.
So as some famous Greek philosophers would say “know thyself” and then build a dividend stock portfolio that is right for you.
Use the examples from this article as you start your research.