Building The Ultimate Dividend Portfolio From Scratch:

An introduction.

Every sports car owner I’ve ever spoken to agreed that it’s much more fun to accelerate quickly than to drive fast.

The same, I think, holds true for investing, which is why, strange as it may sound, I am a little glad I did not have it.

I made the decision to start investing in dividends seriously about 4 and a half years ago. I made the decision to put practically every penny into dividend stocks at that time, despite the fact that I have been trading stocks for a lot longer.

I must admit that I had a lot more fun when I was first starting to build my portfolio, even though it is now much larger. I still enjoy every part of my work and portfolio management, but I no longer have the freedom I did in those days. These days, the majority of my portfolio moves are minor tweaks and thoughtful additions. I was like a painter sitting in front of a blank canvas when I first started.

Importantly, everything was cheap in 2020, as the chart below illustrates, when the market was trading at about 16/17x forward earnings (not including the pandemic impact). Back then, building a portfolio was similar to being a child in a candy store with way too much money.

As a result, I believe my friend Nate was spot on when he made the following comment.

Options + Choices = Pleasure!

I’m not writing this post to complain about the market’s high prices and the difficulty of managing a portfolio, though. No, I will discuss how I would build a dividend (growth) portfolio if I had to start over in this post.

Helping those who are unsure of where to begin and sharing some intriguing investment options that I would purchase in order to increase the likelihood of long-term wealth creation are the goals.

Let’s get started!

The key to success is dividend investing.

My article, “Why Everyone Should Be A Dividend Investor,” was published on September 11. Even though dividends don’t produce economic value, I discussed in that article why dividend stocks are a fantastic option for long-term investors.

A dividend is simply a transfer of funds from a company’s balance sheet to an investor’s brokerage account, after all. The transaction even destroys value when taxes are taken into account.

The ability of a business to pay dividends is what counts. That communicates with the market. It all comes down to their dividend-paying capacity. I wrote this on September 11th.

Strong balance sheets, steady earnings growth, healthy free cash flow growth, and business models that enable them to pay out cash to shareholders annually are all characteristics of dividend growers. Ultimately, in order to pay dividends, businesses must be in excellent financial standing. Businesses that are struggling cannot raise dividends on a regular basis.

Many investors favor stability. They are confident in a steady dividend grower. Dividend growers are considerably more reliable than high-risk, rapidly expanding businesses, which might perform better in extremely bull markets. Investors typically favor that.

A company is likely to have discovered a business model that gives it an advantage over rivals if it is continuously increasing its dividend. Its future is bright because of this.

Income is what dividends are. If you own income-producing stocks, it’s usually simple to hold onto them and add to your weakness. This is among the causes of the generally low volatility. You will need to use option strategies or sell shares gradually if your stocks don’t yield income in order to get cash flow from your investment.

Since dividends are frequently reinvested, the stock price is supported.

These attributes have allowed dividend growers/initiators to outperform dividend payers and the equally weighted SandP 500 by a respectable margin, generating an annual return of 10.2 percent between 1973 and 2023. Better yet, they achieved this while lowering the standard deviation, which enhanced returns and reduced risks for investors.

Right now, the only significant drawback I can think of is that dividend stocks can occasionally be pretty dull. When the market was flooded with cash by central banks in 2021, for instance, “everyone” jumped into derivatives and rapidly expanding businesses. Sometimes it seems like we aren’t invited to a really cool party during these kinds of times. But because these businesses add genuine value, dividend growth is just incomparable over the long run.

I utilized the Schwab U.S. stock exchange and the ARK Innovation ETF (ARKK) to illustrate this. A. SCHD, or Dividend Equity ETF. Although ARKK was up more than 700 percent during the pandemic, as we can see below, the dividend ETF has performed better since October 2014. Even though I’m picking and choosing, the key takeaway is that value is created through consistency.

Nevertheless, realizing that dividend growth is the way to go is only the first step. Just like when you decide you want to take a vacation in Europe, the second step is where things get complicated. Germany, France, Italy, and Spain are all in Europe, but they are all very different. Where do you go?

Prioritize quality above all else.

For dividend investors, concentrating on yield is one of the most frequent blunders.

Some novice investors have the mentality that we must identify the highest-paying dividend stocks because dividend investing is all about making money.

I can’t even begin to count the number of portfolios I’ve seen of people who squandered their hard-earned money by purchasing businesses with yields higher than 10% that ultimately resulted in dividend reductions and capital losses.

Remember that, as we just covered, the best-performing stocks on the market are dividend growers, and the worst-performing stocks are dividend cutters.

With “sucker yields,” the risk increases with the yield. “.”.

The following quote was used in a recent article.

[. A business that consistently pays out increasing dividends is most likely in good financial standing; on the other hand, one that pays out enormous dividends is most likely having trouble and may be in a desperate attempt to draw in investors. You get a lot of income but also a lot of risk if you put a lot of those into an ETF. A Wall Street Journal article.

Since choosing the right stocks can be challenging, I write about dividend (growth) picks in nearly all of my articles. The Wall Street Journal also covered this topic last year when it published an article titled “Analysts advise against looking for companies with the highest dividends.”. Pay attention to cash flow. “.”.

In essence, you must consider the dividend from the viewpoint of the business owner. For this reason, I always approach dividend stocks as though I were purchasing the company as a whole. Unless I wouldn’t mind making it my sole investment, I wouldn’t put money into a company.

“The companies that have given their dividend careful consideration and have a philosophy behind their actions are the best dividend companies,” he says. The current cash flow and their long-term growth goals for the company should serve as the foundation for this. The Wall Street Journal.

Prior to evaluating the yield, examine the business model of the company. Does it have a plan to increase free cash flow over time, a competitive edge, or a moat that enables it to defend itself against rivals over time?

Most of the time, a company’s dividend will be fine once these issues are resolved.

When you concentrate on businesses that are increasing their dividends, you can usually be sure that they are very profitable. He claims that making an investment in them can be a defensive move during uncertain times. According to Morningstar, the average decline in dividend funds last year [2022!] was 6 points, 68 percent, while the S&P 500 index fell 19 points, 4 percent. The Journal of the Wall Street.

Investors ought to give careful consideration to whether they would rather invest in ETFs or handle the work themselves. ETFs are a better option for the majority of investors because they let them purchase a diverse basket of premium stocks without doing any research. As a result, they can potentially increase their investing power by reducing risks and freeing up a lot of time for their primary job.

Furthermore, I think that the majority of investors (in general) are ignorant enough to evaluate dividend stocks and the market. Too many people have made terrible financial mistakes that I have witnessed.

That being said, things are different on Seeking Alpha. Our community’s goal is to produce alpha, after all. Given the caliber of discourse in the comment sections, the investors we are dealing with are different. I often believe that investors know what they are doing, which is why we talk about so many unusual investment opportunities, regardless of whether someone has a $10,000 or $10,000,000 portfolio.

The Seeking Alpha community is just competent enough to invest in individual stocks, which also explains why I hardly ever talk about ETF opportunities.

However, it makes sense to have some exposure to ETFs.

Commencing with scrap.

But I chose to buy five different stocks.

I anticipated adding new capital to my portfolio in a timely manner. It was beneficial that I recently found a respectable job that enabled me to do that.

I tried to balance growth and value when choosing stocks, which helped me create a mini portfolio that resembled an exchange-traded fund (ETF).

Even better, I was able to strategically grow my portfolio with the five stocks.

These, if I recall correctly, were my first five investments.

One of the biggest electric utilities in the US is Duke Energy (DUK). This company offered increased safety and income.

Union Pacific (UNP): Over the years, this railroad has outperformed the market thanks to its aggressive buybacks, enormous wide-moat footprint in North American transportation, and stellar dividend growth history.

In addition to income, Public Storage (PSA) provided me with exposure to the housing and consumer markets. By purchasing this REIT, I was able to accomplish multiple goals at once, as self-storage revolves around consumers purchasing unnecessary items and homebuyers in need of extra storage.

I purchased a Dividend Aristocrat (now a King) from PepsiCo (PEP) because it had anti-cyclical consumer exposure, which increased income growth and provided security.

RTX (RTX): Due to the company’s significant presence in both commercial and defense aerospace operations, I purchased diversified aerospace exposure. Its dividend growth profile is also excellent.

Building a portfolio is essentially like cooking, in my opinion. You can start adjusting your recipe to your preferences after you have a solid base. The majority of Italian recipes begin with a sofrito made with celery, carrots, and onions.

You can then add meats, tomatoes, and other ingredients to make it more flavorful.

Despite how absurd it may sound, I think this way of thinking can help people avoid trouble. For instance, I had created an ETF-like portfolio without taking any significant risks by purchasing these five stocks.

After I resolved this, I made additional investments. For instance, because I have a strong interest in the Class I railroad sector, I purchased more transportation stocks. Right now, my portfolio consists of 23 stocks, including three railroads. That might sound like a lot, but I made sure to avoid overlap because I own three railroads: one for the West, one for the East, and one for Canada, Mexico, and the Chicago to South corridor.

I added additional defense contractors as well. However, I added businesses at various supply chain stages, making sure to keep it distinctive. This includes major OEMs like Lockheed Martin (LMT) and pure-play supplies.

I have strong diversification because most of my industrial exposure comes with anti-cyclical demand, even though my portfolio sector breakdown looks awful. Furthermore, practically every business has a large moat.

In addition, I own a single pipeline owner, two ultra-high margin landowners with diversified businesses, and a single oil production company.

That being said, I would make a few adjustments if I had to start over without the luxury of researching stocks and markets virtually every waking moment.

Initially, I would allocate approximately 50% of my portfolio to exchange-traded funds (ETFs). Even though, as a non-American investor, I am unable to directly purchase American ETFs, I would allocate about 25% of my portfolio to the S&P 500 ETF (SPY) and another 25% to the Schwab Dividend ETF.

In this manner, I would be heavily exposed to the market and concentrate more on dividend stocks. Depending on where we are in the economic cycle, I would receive an average yield of 2 percent and average annual dividend growth in the high-single to low-double-digit range if SPY yields 1 point 2 percent and SCHD yields 3 point 5 percent.

It would resemble this.

With two of the best ETFs on the market holding half of my portfolio, I greatly reduce the chance of making significant mistakes by managing it this way.

With certain restrictions, of course, the other half lets us be creative.

For my part, I would continue to invest in a mix that yields between 2 and 2.5 percent and yields dividend growth that is nearly double digits per year. I would use the pyramid I covered in earlier articles for that. Due to its emphasis on comparing income and growth, this approach supports people’s asset allocation.

For instance, we invest in high-growth, low-yielding stocks at the top. We purchase high-yielding, slowly growing stocks at the bottom. Generally speaking, the emphasis on the bottom increases with age. We are more inclined to own lower-yielding growth stocks when we are younger.

In light of that, I would probably limit my investments to ten to fifteen separate ones with minimal overlap. This also entails monitoring the ETFs. Since FANG+ components are highly visible in the S&P 500, as we can see below, we do not need to purchase many of them. Additionally, we are not required to purchase the SCHD ETF’s largest holdings, which are displayed on the right side below.

Therefore, with 5% exposure each, I would purchase the following picks.

Union Pacific (UNP): This investment offers me significant wide-moat transportation exposure and a dividend yield of 2.2 percent.

RTX Corporation. (RTX): This investment offers me exposure to the commercial and defense aerospace sectors, a yield of 2.1 percent, and steady dividend growth. I can avoid purchasing other aerospace companies by purchasing RTX.

With a yield of 2.6 percent, Texas Instruments (TXN) is a reliable dividend payer that also engages in more aggressive buybacks. It leads the industry in industrial semiconductors and has achieved economic reshoring in the United States. S. . Additionally, it gains from increasingly sophisticated automotive and industrial goods.

As a landowner in the Permian Basin that gains from water sales, oil and gas royalties, and a variety of surface operations, Texas Pacific Land (TPL) provides me with extremely high margin energy exposure. Although its yield is only 0.5 percent, its growth profile outperforms that of practically all energy stocks.

Canadian Natural Resources (CNQ): I would purchase CNQ in addition to TPL. With a 5 percent yield and high-margin operations in Canada’s oil sands, it gives the majority of its free cash flow back to shareholders. TPL yields only 0–5 percent, so I added it because of its higher yield.

With a yield of 0.8 percent, Carlisle Companies (CSL) boasts a substantial presence in the construction materials industry and double-digit annual dividend growth. It is among the biggest winners in what I consider to be the golden age of commercial building restorations because the majority of its sales are for maintenance operations. Nearly sixty is the average age of a commercial building. Overall, it’s a fantastic choice for building or homebuilding.

With a yield of 2.2 percent and exposure to the do-it-yourself market, The Home Depot (HD) is a formidable competitor. This also applies to American consumers. A strong customer base generally indicates that HD is doing well. The business succeeds if, in that case, housing is also robust.

Business models from Mastercard (MA) and Visa (V) are fantastic. Essentially, when we purchase MA or V, we are purchasing a business that profits from each transaction made using its cards. Like a royalty on the world’s consumer expenditures. Both have growth that is difficult to match, even though their yields are less than 1%. I regret not purchasing MA/V at the beginning of my portfolio.

Microsoft (MSFT): Despite the fact that MA is not inexpensive in this market, I want to profit from its strengths because it offers great “big tech” exposure through its operations in cloud computing, personal computing, artificial intelligence (AI), and much more.

Intercontinental Exchange (ICE)/CME Group (CME): I think it’s difficult to find a better deal than what ICE and CME offer when it comes to purchasing financial exposure (beyond MA/V). The first one is the owner of NYSE and has amassed a remarkable portfolio that includes mortgage technologies and more than 50% recurring revenue. The largest futures exchanges in the world are owned by CME, which also pays a special dividend each year, increasing its total yield to about 4.5 percent this year (that’s what I expect with high confidence).

There are, of course, countless variations. If I wanted to, I could have written a 10,000-word piece about my numerous portfolio ideas. Additionally, SCHD overlaps with HD and TXN. That doesn’t bother me, though, because I would gladly be overweight in these investments.

The fact that building a strong portfolio is not particularly difficult is what counts in the end. The difficult part is determining the best course of action and adhering to it. For this reason, in the upcoming months, quarters, and years, I will keep talking about investment strategies and good choices for a variety of investors.

Kindly share in the comments how you would begin anew or whether you plan to make any significant adjustments to your portfolio.

takeout.

It’s a thrilling journey to build a dividend (growth) portfolio, one that rewards perseverance and wise choices.

In light of my personal experience, I’ve discovered that the secret to success has been to prioritize quality over yields and approach stock selection as though it were preparing a delicious meal. When purchasing stocks, I also like to use the “ownership mentality” since it facilitates long-term company ownership.

Although strategic stock selections can eventually add substantial value, ETFs can offer diversification and lower risks for novices.

In order to balance growth, income, and long-term wealth creation, if I had to start over and had little time to research stocks, I would combine individual stocks with exchange-traded funds (ETFs).

Keep in mind that the objective is to create a portfolio that, regardless of the market and economy, grows and sustains wealth.