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How To Build A High-Yield Dividend Portfolio

Building a high-yield dividend portfolio is a great way to put your money to work. By investing in stocks that pay above average dividends you can build an income portfolio to generate passive income.

By John DoePublished 4 years ago 5 min read
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How To Build A High-Yield Dividend Portfolio
Photo by Austin Distel on Unsplash

Unlike traditional portfolios that focus on growth over long periods of time Income Portfolios or High-Yield Dividend Portfolios focus on generating regular income from your investments. The goal of an Income Portfolio is not to grow your assets but to generate a passive income stream to supplement your regular income. Depending on your situation, it might be a great addition to your asset allocation.

What Are Dividends?

To understand how high-yield dividends works we must first understand what dividends are and how they work. When you buy shares (i.e. stocks) in a company you are become a partial owner of that company. As a shareholder you are entitled to a percentage of the profits which are paid either monthly, quarterly, semi-annually, or annually.

The "dividend yield" is the amount a company pays out expressed as a percentage of its share price. For example, if a share costs $10 and the share pays out $1.00 per year it has a dividend yield of 1%. It's important to understand the dividend yield is far more important that the dividend amount. For example, if we have two companies that pay $1 a year, but company A's shares are trading for $10 each and company B's shares are trading for $20, which of them will pay investors more?

  • Company A Dividend Yield = 1/10 X 100 Shares = $10 a Year
  • Company B Dividend Yield = 1/20 X 100 Shares = $5 a Year

Even though both companies pay investors the same amount per year, we see that it would take twice as many shares in Company B to generate the same amount of income as we would from Company A. It is for this reason that investors choose to invest in stocks with high dividend yield when building an Income Portfolio. A higher yield means you can generate more income with a smaller investment.

What Is A Good Dividend Yield?

Most people would say that higher the dividend yield the better. After all why would you ever choose to invest in a company that pays you less? The answer is simple: risk tolerance. Remember that every dollar paid to shareholder is a dollar not being reinvested into the company. Hence if a company is not doing enough to expand and grow it could cause the stock to drop in value. For example, if a stock pays you $100 in dividends, but your initial investment drops by $200 you aren't coming out ahead.

The truth is it's hard to say what a "good" dividend yield is because the answer will vary with interest rates and general market condition. If you can make 2% with a savings account there is little reason to invest in a stock with 2.5% dividend yield. Why take on the risk for a misally 0.5%?

You also need to consider how much risk you can take on. If you are being cautious then an extra 1% in earnings might be enough, but if you want to be a bit more risky you can look for higher yields.

Assessing Dividend Safety

It's important to remember that a dividend can be reduced, suspended or omitted at any time. With the exception of REITS, a company is under no obligation to pay its shareholders anything (an many do not). So when looking into which company to include in your Income Portfolio consider if the dividend is secure and if it will be paid in the future. While it's impossible to know the future there are a few ways types of stocks that are a "safer" bet when it comes to dividends.

Real Estate Investment Trusts - If you really want to know more about REITs then read the article but in summary, REITs are companies that own a large collection of properties and are required to payout 90% of their profits to shareholders. Since they are under this obligation they will have to pay investors for as long as they exist.

S&P 500 Dividend Aristocrats - A dividend "aristocrat" is a collection of companies that have increased their dividend payouts for a minimum of 25 consecutive years, are currently part of the S&P 500 index and have a minimum market capitalization of $3 billion. These combined factors make the "Dividend Aristocrats" a safe bet for you Income Portfolio.

Utility Companies - Since utility companies have reliable earnings and little competition they can regularly pay dividends with above-average yields. That combination of predictable profitability and income generation makes utility stocks lower-risk options for investors.

Setting Up Your Dividend Portfolio

1. Diversify - When you build your dividend portfolio in at least 25 to 30 good stocks spread across 5 to 7 sectors. For example, you might find that energy stocks have nice dividends, but you risk losing your investment if something happens to the global energy supply. If you don't want to pick stocks consider investing in a High Dividend Yield ETF from an established investment group like Vanguard.

2. Choose Stability Over Growth - As stated above, don't just chase high yields. Pick stocks with little volatility and a history of paying out dividends. The S&P 500 Dividend Aristocrats are a good example of a safe source of dividends because of their size and history of dividend growth.

3. Reinvest Your Dividends - Don't just spend the money generated by your income portfolio, use it to buy more shares in the companies you already own. This will result in higher dividend checks in the future and help you grow your income portfolio.

How Can I Start Building My Income Portfolio?

If you've made the decision to begin investing in high-yield dividend stocks you need to open a brokerage account and fund it with the money you plan on investing. There plenty of options out there but I recommend WeBull.

It is a free trading platform designed for professional traders. The lack of fees will help you increase your returns and the professional research tools will help you make a better decision on what high-yield dividend stocks are good investments.

The platform is also running a promotion where they are offering 2 free stocks valued up to $1000 each to all new investors. This is a great way to start of any portfolio so check out this article if you want to learn more about WeBull or sign-up here if you're ready to get started.

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John Doe

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