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What Makes for a Good Dividend Portfolio?

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This is a guest post by Mike, aka The Dividend Guy. He authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Rock. He is a passionate investor.

I’ve been following Joe’s blog since 2011 because I was amazed by his goal to retire so young and his method used to achieve it. The funny thing is that he has been commenting on my blog since 2011 as well and he probably likes the way I approach investing. We definitely share that in common: the quest to generate passive income. There are tons of ways to generate passive income (creating a side business, buying a rental property, earning royalties on a book, investing, etc.) I think the most accessible way to generate a passive income is definitely to invest in dividend stocks. While your capital will grow over time, you will also earn quarterly dividend payouts as long as you hold your shares in a brokerage account.

Unfortunately, investing is far from easy and many people lose money trying to do better than their financial advisors. What is the difference between a good portfolio and a bad portfolio? Why does someone make money each month while you see your stock values drop? In other words; what makes a good dividend portfolio?

It’s All about Three Questions

Investing doesn’t have to be that complicated; you don’t have to stare at 5 different screens showing graphs that you can only pretend to understand to be successful. It can be very easy and straight forward… as long as you can answer these three questions:

#1 What to Buy?

Buying shares of a company is as easy as buying a cup of coffee at Starbucks. The thing is you have so many options that you can definitely pick the wrong one! Some investors are tempted by the flavor of the week; you know the company that is buzzing in the news all the time and people tell you it’s an amazing opportunity? The question you should be asking is why is the stock is going up? Is it because it shows strong sales & profits or because everybody is drinking the Kool-Aid and this drives the price higher?

Some others are looking for so much passive income that they are blinded by a high dividend yield like 7%. Think again; in such a low interest environment, why a company would bother sharing so much of its after tax income to generate a 7% investment yield? There must be something wrong within the company.

In order to know what to buy, one must determine their investing strategy. You can write a whole library of books about investing strategy but mine fits on a piece of paper. I have a set of financial data I look for. Here’s the quick list:

Dividend yield over 2.50%

Dividend payout ratio under 80%

3yr/5yr Dividend growth positive

3yr/5yr EPS growth positive

3yr/5yr Sales growth positive

P/E ratio under 20

Once I’ve made a list of stocks that meet these criteria, I look at the company overall to see if the business model makes sense and where this industry is going. Some say I’m picking stocks with low dividend yields, I answer that my US 2013 picks made 37% so I don’t really mind if my yield is lower than 5%!

#2 When to Buy?

There are lots of theories about when you should buy a stock. The obvious answer is when the stock is low. But there is always a reason why a stock is low. It’s mainly because most people don’t think it could go back up. Are they right? Are they wrong? If you can’t figure it out, you will be losing money buying a stock that is down.

My favorite moment to buy stocks is when the whole market is going down. But then again, this is quite obvious; people buying towards the end of 2008 made a lot of money. But since then, we haven’t had much bear market in which to buy new shares. I don’t think it’s a reason to stay on the sidelines and wait with an account full of cash.

The right moment to buy for me is when a company meets both my financial and qualitative criteria. I don’t mind if the stock is at an all-time high, if it’s justified, it will continue to go higher. I believe it is more important to know why you buy a stock than when!

#3 When to Sell?

You can’t make money off the stock market if you don’t sell your shares. The numbers printed on your statement after you bought a company is only paper profit until the moment you sell. This is why it is so important to know when to sell to make money off your investments.

I usually sell for two reasons: #1 because the company doesn’t meet my criteria anymore (sales are down, dividend gets cut, problems within the industry, etc.) I usually check quarterly results for each company I follow to make sure they continue their good work after I purchased them.

#2 because I’ve put a stop sell assuring a minimum profit on my trade. I like using a stop sell as I’m 100% sure to make money on a stock once I’ve determined I can get out at a specific price. As long as the shares are over the magic number, I keep my investment and rack-up the dividend. If the share price drops and hits my bottom price, the stock is automatically sold and I cash out my profit.

This is a simple but effective way to manage a portfolio and it works! All you need is an investment strategy and the discipline to apply it no matter what.  If you are looking for a longer explanation on how I manage my portfolio, you can read about my dividend growth model.

Are You Looking for Help Managing Your Portfolio?

If you wish to manage your own portfolio but you lack the time or knowledge to do it, I’ve built a tool called Dividend Stocks Rock to help you. This site offers everything you need to become a successful trader:

A bi-weekly investing newsletter;

8 different stock lists to help you pick from the best among the best;

12 live portfolios covering small to $500K+ portfolio sizes

An exclusive Stock Ranking system to help you buy and sell at the right time

I continuously add more features to Dividend Stocks Rock. Strong from my first 10 portfolios (8 of 10 beating the market), I’ve created the $500K+ portfolio. I’m currently working on adding ETF lists to provide you with a broader range of investment solutions. You can even try the service for 30 days and cancel without any fees, how about that?

If you have any questions on how I manage my portfolios or about my service, please leave a comment on Joe’s site and I’ll be more than happy to answer all your questions.

Best,

Mike

The Dividend Guy

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{ 8 comments… add one }
  • Nicola July 7, 2014, 4:43 am

    What a fantastic and helpful post – thank you! As someone who is yet to take the plunge into stocks, your method for choosing stocks and reasoning why is very useful 🙂

  • Mike July 7, 2014, 8:10 am

    Hello Nicola,

    If you have any questions about how to start your portfolio, please send me an email; [email protected]

    I’ll be able to walk you through and give you some tips. Also, the free blog on my website (Dividend Stocks Rock) contains only 2,000+ words article on how to build your portfolio.

    Best,

    Mike

  • Brian July 7, 2014, 4:42 pm

    Mike, thanks for the column as it was very informative. Though I was wondering what your thoughts were on (non-401K) mutual funds? It’s obvious to say that they along with individual stocks have done well in this current bull run. Though I just wish I could get the dividend payments in cash as opposed to having them automatically reinvested.

    • Mike July 8, 2014, 11:07 am

      Hello Brian,

      Since I’m a DIY investor, I don’t like mutual funds too much. The first reason being because I don’t have the control over my investment (e.g. I can’t increase or decrease a position in a specific sector or stock) and the second reason being the fees.

      It’s a great solution for someone who doesn’t know much about investment and doesn’t really have any interest in learning. Not everybody should become a DIY investor.

      Several mutual funds offer the possibility to cash the dividend paid (along with other revenues generated by your fund). You might want to give a call to your advisor ;-).

      Cheers,

      Mike.

  • allen July 7, 2014, 9:01 pm

    I am a very seasoned investor, and I also think this is excellent advice for novice, if not all investors. I will add one criteria. Go to Yahoo or another financial stock and view the stock price going back as many years as they have. 20 years if the company has had stock that long. What are you looking for? Your looking for low volatility. How did the stock do from 2000 to 2002? How about 2008 to 2009? Look at the high to the low and calculate the percentage drop in stock. Would you be O.K. if it took that dive again? It well may, so if that freaks you out, maybe that stock isn’t for you. I ALWAYS look at the 2008-2009 drop before investing in a security.

    • Mike July 8, 2014, 11:10 am

      Hello Allen,

      Good point but I would bring it a little bit further: Somes stocks took a huge dive in 2008 for absolutely no reasons (I’m thinking Canadian Banks for example). However, if you are willing to start investing by your own, I think you should be willing to lose at least 20% of your portfolio at one point in your life.

      It happened to me in 2008 (-27%) and it will happen again. Instead of buying a low volatility stock, I concentrate my effort in building a low volatility portfolio. This is why I have a “core portfolio” built from consumer stocks and blue chips and I have a “growth segment” of stocks showing more potential (but higher volatility).

      Thx for your comment!

      Mike

  • Great guide. I’ve just dipped my toe into the individual stock pick world. My focus has been more on long term gains than dividends, but that’s definitely something I want to look into in the future.

  • Mike July 8, 2014, 6:57 am

    Hello Stefanie,

    In fact, if you are looking for long term stocks, dividend stocks are probably among the best choice. Companies that qualify for a long term investment period are usually strong companies with a solid business model. This is usually the same type of companies who pay dividend year after year :-).

    Cheers,

    Mike

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