A great investing strategy for long term investors is to build
a dividend paying portfolio
. As you are growing your wealth, you can
reinvest the dividends to buy more shares and grow your positions along the
way. Then as you reach retirement, ideally you will be earning enough in
dividends to cover some or all of your living expenses. But how do you build the
best dividend yield portfolio?
Many investors think you can just focus on the yield and be set, but this can end up costing you a lot of money over the long term. Instead, to build the best dividend yield portfolio, you need to follow the 4 tips I outline below.
4 Tips For Getting The Best Dividend Yield
#1. Don’t Let Yield Be The Only Factor
When trying to build a portfolio of dividend paying stocks, you can easily get lost in finding the highest yields possible. This can cause a major issue in your portfolio however. In many cases, some of the highest yielding stocks tend to be in the utility sector.
As a result, you might build a portfolio that is overweight in this sector. On the surface it might not look like this is an issue. But if you have utilities in the Southeast, Mid-Atlantic, and Northeast parts of the country and a major storm wreaks havoc on this area, you could suffer great losses.
The point is you need to make sure you are fully diversified when building your best dividend yield portfolio. Be on the lookout for good investment opportunities, but make sure you keep an eye on how diversified your overall portfolio is.
#2. Pay Attention To History
A mainstay for many dividend investors is investing in those companies that have a solid history of paying and raising their dividends. The companies that have paid dividends for over 25 consecutive years are known as aristocrats.
This is a great place to start when building your portfolio. This is because if a company has paid a dividend for 25 years straight or longer, you can be sure they will continue to do so. After all, in the last 25 years, there have been many bull markets, bear markets, recessions and corrections.
If a company can pay a dividend during the good and the bad times, you know you have a winner for your dividend portfolio.
#3. Don’t Overlook Growing Companies
While it is great to start your search with the aristocrat list, it shouldn’t be your only resource. After all, there are a lot of strong companies that might have just started to pay dividends or have only been paying for 10 years or so.
These companies won’t show up in the aristocrat list but can be diamonds in the rough. Additionally, while some companies might not be paying a high yield at the moment, if they have been consistently raising their dividend payment, chances are they will continue to do so in the long term. And this increase in dividend payment can turn out to be a nice amount every quarter.
#4. Distinguish Between Highest And Best
The biggest flaw new dividend investors make is only looking at yield. You have to remember that yield is made up by dividing the annual dividend payment by the current stock price. This can cause issues if the company has hit a rough patch and the stock price has dropped.
For example, let’s say you are searching for a stock and come across a company paying $1.25 annually in dividends and is trading at $20 a share. Their dividend yield is 6.25%. This is a great yield, but what is going on at the company?
By this I mean, is the drop in stock price a reflection of long term troubles for the company? If it is, then chances are they will be cutting the dividend because the payout rate is unsustainable over the long term.
If they drop the annual dividend to $0.50, then the yield suddenly becomes 2.50%. This isn’t terrible, but depending on what you are trying to achieve, it might be a stock that you would now no longer consider. Plus you have to factor in that chances are the dividend won’t be raised for the foreseeable future either.
As a result, you need to make sure you are investing in high quality companies that can continue to pay their dividend and raise it going forward. These are the best companies to invest in.
At the end of the day, building the best dividend yield portfolio takes a lot more work than you would think. This isn’t to say it is impossible, but you can’t just look at high yields and assume these stocks are the best ones you should be investing in.
In many cases, you should try to build a portfolio of stocks that consistently increase their dividends each year. Ideally, the yield they pay out will be close to your goal. In time, as they increase their payout, you should be able to hit your target yield.
And eventually, these stocks and their dividends can help you to afford retirement.