5 Steps to Build a Dividend Portfolio from Scratch
Hi, I’m Ian.
I invest primarily for dividend income and had built a portfolio filled with stocks that pay growing dividends on a regular basis. As I write, I’m earning 6+% a year in dividend yield and I receive dividends in 8-9 months out of 12 in a year.
I hope the same for you too.
You may ask: ‘Ian, how and where do I start?’
In this article, I’ll share 5 steps to build a stock portfolio that generates dividend income consistently from scratch so that you too can enjoy the same results for your own investments. Believe me, it’s really easy, safe, and profitable. So, here we go:
Step #1: Set Your Investment Objective
May I reckon you to set an investment goal such as:
I would like to earn $ _ ,000 in dividend income a year by year 20 _ _.
(Enter your own target)
If you’re new to investing, set a small and easily attainable figure with a shorter duration. A great example could be:
I would like to earn $ 10,000 in dividend income a year by year 2022.
(which is 3 years from now)
If you’re more seasoned, you may revise the goal upwards to suit your needs.
Step #2: Set Your Criteria of a Dividend Stock
It is obvious that you need to look into dividend-paying stocks in order to build a dividend portfolio. The question is: ‘Do you want to earn increasing dividends on a consistent basis from making an investment into a stock?’
For instance, I invested into a stock and I received the following:
Dec 2016: Investment Made – ($ 1.01)
(Bracketed Figures means Cash Outflow)
Feb 2017: Dividend Collected – $ 0.0187
May 2017: Dividend Collected – $ 0.0186
Aug 2017 – Dividend Collected – S$ 0.0189
May 2019 – Dividend Collected – S$ 0.0202
In 30 months, I have received 10 dividend payments amounting to S$ 0.193 and am enjoying a 59% capital growth from this stock. My total returns would be 75 -80% in the 2½ year period.
If you intend to replicate such returns to your portfolio, you may model my own predetermined criteria of what a good dividend stock is:
– It has a resilient business model.
– It pays consistent growth in dividends for the last 5-10 years.
– It has a plan to grow its income (and dividend payouts) in the next 2-3 years.
#3: Build a Watch List
There are 900+ stocks listed in Malaysia and 700+ stocks listed on the SGX. And, if you choose to invest in Thailand, Hong Kong, Mainland China, and the United States, you’ll have _0,000+ stocks for you to choose from.
You may start with your base country. Let’s say, you’re in Singapore. Hence, you may start by searching for dividend stocks listed on the SGX.
Build a watch list of 30 dividend-paying stocks. When you build the database of stocks, here’s a suggestion: Do not invest in any one of them yet.
This step is intended for you to learn how to assess the fundamental quality of a stock by reading its annual and quarterly reports. Do not focus on their stock prices for they are distractions (especially to newbies).
You’ll emerge as a sharper investor after finalising your top 30 dividend stocks.
#4: Calculate Dividend Yield
I believe, in your pool of 30 dividend stocks, not every single one of them are at their lowest possible prices. So, step #4 is about you fishing for the best deals in your pool of 30 dividend stocks.
Personally, my take of a ‘better deal’ is:
– A stock that is offering above 5% in dividend yields per annum.
– A stock that is offering a dividend yield above its 10-year average.
Therefore, I would calculate a stock’s current dividend yield and will compare it with its dividend yields for the last 10 years. That would tell me whether or not, the stock is priced at its reasonably lowest and offering the best dividend yields at current prices.
You may want to do the calculation for these 30 stocks on a regular basis.
#5: Do Financial Planning
Achieving financial freedom starts with assessing your current financial status.
There are two factors that would influence how quickly you would be attaining your investment objectives set above in Step #1.
First, it is your initial capital.
Second, it is your ability to raise cash / save money per month.
Supposedly, you have set a target to earn $ 10,000 a year in dividend income by year 2022. You plan to attain it by having a portfolio which is paying out at least 5% a year. As such, you need to build a portfolio worth $ 200,000 by 2022.
= Desired Dividend Income per Annum / Annual Dividend Yields
Presently, you have $ 50,000 in initial capital and are saving $ 1,000 a month for the purpose of building a dividend portfolio.
In this case, it is highly unlikely for you to hit the $ 200,000 mark by 2022 based on your current financial standing. You may need to:
– Lower your target to, let’s say, $ 100,000 portfolio that earns $ 5,000 a year or
– Raise your income and boost your savings.
I’ll leave you to decide which of the two is easier for you.
Question: Should I instead invest for growth?
Ideally, if you’re new to investing, please don’t. Here’s why:
When newbies talk to me about ‘growth investing’, most likely, they are merely trying to bet, speculate, gamble the stock market. They are in for trouble.
Growth investing works better for seasoned investors – People who had gained experiences, insights, and wisdom in building portfolios. That may not be you if you are new to investing. Don’t try to fly when you don’t know how to walk.
Question: What if I can’t save more than $ 1,000 a month?
Honestly, it’s best for you to build up finances first before investing.
You may take whatever savings you have to learn a skill, start a business, or do anything to raise your level of income. You may come back into the game once you are more financially established.
Ka Ching! You’d Received Your First Dividends
You’d graduated from a newbie to a dividend investor.
The amount may be small but it’s okay. Your next payment will be bigger and it will grow over time.
You may choose to spend the dividend with a small treat – a nice makan, plan a day trip, or anything to reward yourself for a job well done!
Alternatively, you may reinvest the dividends (like I did) to further expand your portfolio to greater heights. This would definitely be a very efficient method of building your wealth via stock investing for the long-term, quicken your time to hit your investment objectives.