Investors need to design diversified dividend portfolios that consist of at least 30 individual stocks. The portfolio should draw dividend stocks from as many industries as is smart. If one or more companies in a sector crumble during a recession, it could potentially destroy the whole portfolio structure. Having a diverse foundation would protect investors’ income portfolios in tumultuous market conditions that could lead to dividend cuts or eliminations.
Deciding your holding time frame is another crucial element for retirement planning through dividend stocks. Depending on the amount of capital invested initially, as well as the amount of capital added thereafter, a portfolio requires differing amounts of time to compound to generate a sustainable amount of income. The portfolio would need more time to compound investment dollars in order to reach a target monthly dividend income if the amount of capital added is lower and less time if it is higher.
For example, an investor puts $1,000 per month in dividend stocks maintaining a 4% yield. If he reinvests dividends, the portfolio will generate over $7,900 in annual dividend income in ten years. However, if our investor put away $2,000 per month in the same dividend stock, he would achieve $7,900 in annual dividend income after just six years.
Besides diversification and the power of compounding over time, another crucial factor to building a successful dividend portfolio is stock valuation. Purchasing shares when they are cheap maximizes price gains and dividend income for shareholders over time.
Typically, I look for companies that have raised dividends for over 10 years, trade at less than 20 times earnings, have a dividend payout ratio of less than 60% and yield at least 2.5%. The only difference for master limited partnerships and real estate investment trusts is how I calculate payout ratios and what minimum yield requirements I selected.
A few attractively valued companies today include: