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Dividend Portfolio – Design & Diversification

Dividend Portfolio Design

Prior to working fulltime as a Registered Nurse I did a fair amount of consulting (while I was attending university) for small businesses, individual investors and the odd institutional investor. Recently I’ve been working with a client who wants to build their own dividend growth portfolio for retirement. Portfolio Construction is one of the most daunting tasks an individual investor encounters when they begin to accumulate capital and plan their future wealth.

Frequently an investor asks themselves…

What stocks do I buy?
When do I sell?
When do I buy?
Which stocks are good stocks?
Can I avoid losing money?
Where do I start?…

The last question, Where Do I Start?, is very important because everyone, even myself, struggled with this when we started investing in individual stocks.

When I started I knew what good stocks were and I had the confidence of when I should buy them. When I came to the question of how do I organize my portfolio I remember feeling very overwhelmed and my confidence suffered.

During the process of helping my client develop her own portfolio I’ve made each reader a list of five (5) key items I taught her to focus in on.

These five key items will help even you develop, organize, review and continuously evaluate a dividend growth portfolio properly without getting distracted by other factors.

High Quality Stocks

This is a no brainer, but almost all investors neglect creating a list of high quality dividend stocks as potential (or real) investments and know how to evaluate them. Join my Stock Analysis Mailing List to learn how I perform a stock analysis.

Why form a list?

Think of this as your shopping list. You need to know what items you need to buy, what items you want to buy and what items you should avoid.

This list can be short (10-15 stocks) or long (25-50 stocks). The list of dividend stocks should include companies you know, understand, that raise their dividends regularly, have positive cashflows, stable business models (preferably with competitive advantages) and global operations (if possible).

Dividend Diversification

Avoid building a portfolio of only high yielding dividend stocks. Your portfolio should be about dividend growth not simply high paying stocks. Remember to think about the long-term; some companies consistently raise their dividends 3-8% per year and others raise them 12-30% per year. You want a balance of high yielding stocks that raise their dividends at conservative rates and low yielding stocks that raise their dividends at aggressive rates. This strategy diversifies your dividend growth and helps to compound your dividends and cashflow.

Sector Diversification

This is a no brainer and something all investors should use when investing in mutual funds, stocks or alternative investments. Never place all your eggs in one basket. When you create your list of high quality dividend paying stocks be sure to include companies from all sectors; Financials, Consumer Staples & Discretionary, Energy, Industrials, Telecommunications, Real Estate, Healthcare, Precious Metals, Technology, Utilities, etc.

Some sectors are more cyclical than others and diversifying your portfolio will help you achieve positive returns regardless of where in the business cycle a specific sector or the economy is at any given time.

Geographic Diversification

Just as sector diversification is important geographic diversification is essential. A dividend portfolio should have a balance of investments with exposure to all major economies. A Canadian investor will want equal or proportional exposure to Canada, USA, Europe, Latin America, Asia and other emerging economies (BRIC). There are implications related to taxation that an investor should be aware of, but avoiding geographic diversification of dividends is a vital mistake for an investor hoping to grow their dividends long-term. There are a host of global companies that consistently raise their dividends that a novice investor might avoid because they’re simply not aware they exist.

Relatively Low Beta

The beta of a portfolio (correlation to the overall market) is a very important tool when you are first constructing a dividend growth portfolio. An investor needs to learn to avoid using emotions when investing; no one is perfect from the start. Constructing a portfolio with a beta below 1.0 (the market) will help you avoid making emotional decisions based on how your portfolio moves when the market goes up and down. Dividend stocks generally have a lower beta to begin with which helps this process.

Conclusion

Remember that as a newer equity and dividend stock investor you are the most likely to switch from strategy to strategy rather than staying the course with a sound investment design. If you’ve chosen a group of high quality stocks, have purchased them at appropriate prices and have designed your portfolio properly there is no reason to stress over short term movements in the markets.

Readers of The Stock Analysis Mailing List received a Geographic & Sector breakdown of the mentioned model portfolio along with its actual yield & overall beta

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