4 Top Questions to Answer to Build a Solid Dividend Investing Strategy
by | Posted 11.30.2012 | Post Comment (No Comments)



Before you invest your first dollar in a dividend stock, it’s important to write down your dividend investing process on paper. It may surprise some readers but there is more than one way to build an effective dividend investing strategy. All dividend investors want to see their dividend portfolio grow and make a profit. But not all investing strategies will take into consideration their own personal and financial situation. In order to help guide you to build a solid dividend growth strategy, here are the 4 top questions to answer prior to buying stocks.


How Much Time Do You Have To Manage Your Portfolio?


It’s crucial to answer this question prior to even opening an investing account. If you don’t have much time to spend on dividend investing, an investment broker or advisor may be a great addition to guide you in your investing strategy. It is obviously more expensive but you will avoid a lot of damage that a lack of knowledge can make to your dividend stock portfolio.


Another way to save on time without hurting your dividend strategy is to look into dividend ETFs. They show low MERs while providing an interesting dividend stock portfolio based on the managers’ strategy. Here’s a few examples of dividend ETFs and their current strategy:


Objective Stock Selection Process Avg Yield
VIG Div Growth Dividend increase each year for the past 10 years + payout ratio requirements.


SDY Div Growth Must be part of S&P 500 composite 1500 and shows dividend increases for 20 consecutive years.


DVY Div Growth 5 year dividend growth rate must be positive + dividend payout ratio under 60%.


VYM High Yield Aim for high dividend yield stocks excluding REITs.


HDV High Yield 75 high dividend yield stocks screened by several metrics to forecast business sustainability



Are You Going To Invest New Money Annually?


Injecting money in your portfolio on a systematic basis or every year will affect the moment and the cash available for new purchases. With a systematic approach such as investing with each pay check, you might want to not use DRIPs and combine your money with your dividend payouts in order to build momentum. I personally like to invest systematically in dividend ETFs or funds and wait to have at least $2,000 to $3,000 before buying a new position in a stock. Many ETFs offer the possibility to buy additional shares at no transaction costs.


If you are going to invest new money each year, you must build a stock watch list. Once the money is in your account, it will burn you to make a trade. It’s important that you have list of stocks that could be added to you portfolio in order to make the right choice.


For those who are done investing or can contribute an additional amount, your dividend investing process will change. You are basically “stuck” with your portfolio and any stock additions will automatically mean that you sell another position. If you don’t need to cash out your dividend payouts, using DRIPs to increase your positions is definitely a good idea.


Do You Need To Withdraw Revenues From Your Dividend Portfolio Immediately?


A revenue portfolio is different than a growth portfolio even when we talk about dividend investing. If your #1 investing goals is to cash out a stable income, you will have to look for companies showing a stable business model. You can find those companies among several lists such as

The Dividend Aristocrats

The Dividend Champions

The Dividend Achievers


Companies showing a strong dividend growth history are mature and operate in a relatively mature market. This means that you will see small capital growth appreciation through time but you should earn good and stable dividend payouts.

REITs could be great addition to your portfolio since their distributions are set to be monthly instead of quarterly. If you want a monthly income, it will also be important to build a dividend calendar where you can receive money each month.


Are You Seeking Capital Growth on Top of Dividend Payouts?


It’s not impossible to seek both capital growth and dividend growth with the same portfolio. However, you will have to take additional risk. As opposed to the revenue dividend portfolio, you must adjust your stock filter and accept higher dividend payout ratio or more hectic financial ratios to get additional growth.


It doesn’t mean that you have to pick your dividend stocks blindly. There are several very solid companies that show both strong financial background and growth potential. McDonald’s (MCD) is a great example of this combination. If you look at the past 10 years, the dividend has been increasing while the stock value skyrocketed.


In my most recent book; Dividend Growth: Freedom Through Passive Income, I provide examples of both revenue and growth dividend portfolios and how to manage them.




Disclaimer: I do not hold MCD or any dividend ETFs at the time of writing this article.