Updated date:

Rules to Build a Portfolio with Dividend Stocks


Blogger with many niche specialties. I write about dogs, all things under homesteading, personal finance, how to blog, and beauty/fashion.


Rules to Build a Portfolio with Dividend Stocks

I have a couple of different investment accounts. One of them is my painfully boring retirement account, an experimental portfolio I mostly play around with, and another is my more serious dividend growth portfolio made up of individual stocks. It is important to be extra careful when you are building a portfolio of individual stocks.

If you were the type of person who built a portfolio where you were chasing the high yields, you might be kicking yourself now if there was a recent dividend cut because of pandemic profit loss issues. Super high yields are nice until the company proves unable to pay them.

There are rules for building a proper portfolio about purchasing stocks and when to sell stocks. There are also rules on holding stocks.

1 . When to Buy a Dividend Stock

The usual criteria to focus on when picking the best performing blue chip companies are things like how long they have been paying out their dividend, their payout ratio which should be low, their P/E ratio which should also be low, moderate yield, and many years of proven consistent dividend growth.

In summary:

  1. Long Dividend History
  2. Payout Ratio is low
  3. P/E ratio is low
  4. Moderate Yield
  5. Proven Dividend Growth for Many Years

Some people try to offer specific numbers like generally looking for a dividend below 4%. But each company needs to be evaluated differently based on the different factors at work.

GE, for example, cut their dividend down really low. The general opinion for many is that right now is a good buy for them as they will work quickly to restore their dividend numbers back up and for now they can be acquired at a discount. Best advised to do your own research and draw your own conclusions.

Disney also cut their July dividend for 2020 to conserve cash due to the pandemic. There too many people have decided to buy the stocks at a discount because they have faith in the company and figure dividend activities will be restored once things return to something close to normal.

These are not my own stock suggestions. These are just examples of how one might think when evaluating if a stock is a good fit for their portfolio for a long plan.

2. When to Sell a Dividend Stock

This is the most important part of investing in stocks. Knowing when to sell is critical for ensuring good return on investment.

What is the general criteria to sell?

Most dividend investors bail out when a company does a dividend cut and they have little faith the dividend will be restored in a timely manner. You sell when there is no dividend and in normal conditions the company is proving itself to be functioning poorly.

Things are a little unusual in that department this year with the pandemic activity. I'm a firm believer that every company needs to be assessed and carefully analyzed and doing 100% this or 100% that isn't always the best course. The dividend cuts this year in many cases are the result of unprecedented market conditions.

When market conditions improve many of the previously high rated companies tend to bring back their dividends and the quality stocks appreciate nicely. Some people during such times are all gleeful because they were able to buy up during market lows and get a bunch of discount stock.

3. When to Hold a Dividend Stock

You hold for as long as you can once you have made your selection. Never invest money you might need to be there in 5 years time because your positions might be really high or they might sink down really low like what happened March of 2020. Invest money into stocks when you can ride out the storms because stocks go up and stocks go down.

It is really hard to watch the value of your previously nice portfolio drop to extreme lows. What happened in 2020 is somewhat the same as what happened back in 2008. Most long-range people kept investing like normal and ignored the day to day change in their portfolio. This is probably the best course currently in 2020.

Right now is a good time to relax and hold. The dividends will mostly roll in all the same. The best outlook is that companies are either able to increase their dividends or at the very least maintain their payouts.

As long as a company is maintaining their dividend it is acceptable to continue holding those shares.

Stay the Course and Don't Get Spooked

Many people fresh into investing can't handle market volatility. They see their stock in the red and get an impulse to sell. The stock going down into the red might actually be the best time to buy and the worst time to sell. Normal people can't handle risk and they get scared. None of it matters if you understand the flow of the company.

Recently there was some article where a financial advice type man was talking about a company and said it was poor to look at because it had a huge debt load. The thing he didn't explain was of course the company had a huge debt load in the short term because it acquired a new company.

I looked at it myself and the parent company took on temporary debt to acquire a new asset that should (and did) rapidly increase its growth and profits. People have a hard time thinking about the world a few days into the future and an even harder time thinking 1 or 2 years out.

I try to imagine how my companies might fit into the world 50 years out as that will be the bulk of my investment window though the last 20-25 years will probably be when I'm setting up my assets towards inheritance to my children.

Keep in mind this is somewhat impossible to do with complete accuracy because the game changes all the time. I'll sit around and ask myself questions. Like will people still be using toilet paper in 50 years? Will they still have to go to the pharmacy to buy medication? Will normal meat farming get phased out and will the market shift to lab-grown meat?

I'll even sit around and try to predict new inventions or possible innovations that will make a company lose a competitive edge. The more you think about, the more you see. The better you can guess. Some things are predictable and some things are not because they don't exist yet.

My best bit of advice is to listen to what other people have to say about things. Just make your choices alone. Do your own study, your own research, and decide if a company's stock fits your own individual strategy. Then set your investments to be automated and check on them every 6 months. Of course, keep the news coming your way so you can keep on top of company news or dividend cuts. Otherwise, don't fret about the day to day activity in there.

© 2020 Raven Rae


Indra from India on September 27, 2020: