Dividend portfolios

Stock market participants use different investment methods: active trading, long-term investments in bonds, gold, cryptocurrency, etc. One of the best options for earning regular passive income is the formation of a dividend portfolio. Let's take a look at how to build a portfolio of stocks with a dividend flow.


A dividend portfolio - what is it and what is it for?

A dividend portfolio is a block of shares in several companies that consistently pay income to an investor who owns a stake in their business.

It is formed, as a rule, in addition to the main investment portfolio and is needed to generate additional income (dividends). Dividends are paid by the issuer to all its shareholders after the distribution of the profit received by the results of the reporting period between them.

When forming a dividend portfolio, it is important to choose the right securities and purchase them on time. You should not purchase securities near the day that the register closes, because shares rapidly gain in value before the ex-dividend date. It is recommended to pay attention to the shares of companies that regularly and consistently make payments to their shareholders.

To form an effective dividend portfolio, it is advisable to choose stocks of at least 4-6 reliable companies with a yield of more than 3-4%. These should be securities of enterprises in growing sectors of the economy.

How to correctly form a portfolio for the long term

The following indicators are important to form a long-term dividend portfolio:

  1. The forecasted return on shares is above 10%.
  2. The steady growth in value of securities over the long term.

Sometimes it happens that an investor buys high-yield shares, on which he then regularly receives dividends for some time, but the value of securities decreases during this time. After deciding to sell the shares, the investor finds himself at a loss, regardless of whether he previously received stable dividends.

Finding securities that will rise in value requires a thorough analysis of different companies and a comparison of their main indicators.

You can choose a portfolio of shares only from companies which pay monthly dividend payments, or you may also include the securities of companies with different payment terms. Or you can choose three companies that pay quarterly dividends, and then it may turn out that payments will be monthly.

Is it possible to collect a portfolio once and for life?

In theory, a dividend portfolio can be collected once and you will receive income from it throughout your life.

To do this, it is advisable to purchase shares of reliable companies that have consistently paid dividends over the past 10 years and longer.

But in practice, this is unlikely. Not a single issuing company, even the most financially stable, is immune from the risk of a devaluation of the national currency or a fall in the stock market.

The modern economy is unstable, so the investor must always be prepared for possible changes in the market. It may be necessary to restructure an existing dividend portfolio at any time.

What to look for when picking stocks

Consider the following indicators when choosing securities from which to receive dividends:

  1. The return on an asset is the amount of income that an investor will receive from one share in relation to its value. This value is expressed as a percentage. Typically, stock returns fluctuate between 2-12%.

  2. Liquidity is a value that characterizes the speed of asset realization. The higher this indicator, the better the situation is for the trader, since the investor should not have any problems in the future with the purchase or sale of shares if necessary.

  3. Target price - the predicted price of a stock after a certain period of time. Often expressed as a percentage of the current price.

  4. Volatility - the range of changes in the price of a stock in a specific period. This indicator does not matter much in the case of long-term investments. But volatility should be taken into account if you plan to sell the asset after receiving the dividends.

  5. The financial condition of the company. The higher the profit, the better. A large debt to creditors indicates the company's dependence on external sources of financing, which may further negatively affect its financial position and shareholders' income.

  6. Business development forecasts and plans. Even if the company is going through hard times, but publishes a new business strategy - this is a positive indicator. Stock quotes are sensitive to such information and often change under its influence. It is important to analyze how much money the issuer is going to spend on business development, how much profit it plans to spend on payments to shareholders, whether it is going to release a new product, etc.

Key risk factors influencing the volatility of portfolio returns

4 key indicators affect the volatility of portfolio returns:

  1. The number of issuers included in the portfolio. To reduce risks by 80-90%, it is recommended to invest in equal shares in the shares of at least 20-40 companies.

  2. The ratio of the assets of an issuer to the total number of assets in the portfolio. Securities must belong to enterprises of different sectors and industries. The share of each should not exceed 25% of the value of the entire portfolio.

  3. The indicator of the ratio of borrowed funds to the equity capital of issuers. Assets with large financial leverage are characterized by an increased level of volatility and are associated with risks for the investor.

  4. Market capitalization size. The larger the company, the less volatile its stock.

Rebalancing the dividend portfolio

To reduce the volatility of the dividend portfolio, the investor is advised to periodically resort to the rebalancing method. It consists of bringing the proportion of all the shares in the portfolio back to their original form.

For example, an investor owns shares in 10 companies. Each of them is 10% of the total capital. But after a year, some stocks have strongly grown in value and make up a large share in the portfolio. Other securities have fallen, and these assets are traded on the stock exchange at a very competitive price. The investor's goal is to equalize their ratio, that is, to rebalance the portfolio. Therefore, he sells part of the shares that have risen in price and buys those that have fallen in price. Both sales and purchases are carefully tracked to allow you to have 10% of the shares of each company in your portfolio again.

To moderate the amplitude of fluctuations, you should purchase assets that behave differently in different periods.

Frequent portfolio rebalancing can incur unnecessary costs in the form of taxes and commissions without significant benefits. To achieve the desired effect, it is sufficient to apply this method just once a year on average.

Why you shouldn't repeat someone else's dividend portfolio

It takes a lot of time and effort to collect an effective pool of securities and develop an investment strategy, especially with a lack of experience. Therefore, many novice stock market participants consider copying the portfolio of a successful investor.

But taking the short path in this case has its drawbacks:

  1. Capital deficit. Experienced investors hold differentiated portfolios that contain the assets of leading companies in a variety of industries. A beginner may not have enough funds to purchase them. Owning some of these securities nullifies the whole idea, as the portfolio would become unbalanced. So if assets fall in value, there would be nothing to compensate for this fall.

  2. Lack of tools and lack of time. A successful investor employs staff members who can instantly react to changes in the market. The beginner will not have time to quickly repeat their actions.

A properly formed dividend portfolio can provide an investor with a stable cash flow. In the future, this strategy does not require much time and effort from the owner of the capital. However, this does not exclude the need to always be ready to react to possible market changes.