Building a Dividend Growth Portfolio: A Step-by-Step Guide

This article will take you through the process of creating a robust dividend growth portfolio with a real-life example. We will explore the ins and outs of dividend investing, discussing various strategies, tools, and techniques you can use to build such a portfolio.

Table of Contents:

1. Step 1: Understanding Dividend Growth Investing
2. Step 2: Selecting the Right Dividend Stocks
3. Step 3: Diversification and Risk Management
4. Step 4: Reinvesting Dividend Income
5. Step 5: Monitoring and Adjusting Your Portfolio
6. Tools and Resources for Dividend Investors

Step 1: Understanding Dividend Growth Investing

Dividend growth investing is a strategy that revolves around creating a portfolio of stocks that consistently increase their dividend payments over time. When choosing these stocks, it’s important to remember not to go after the ones with the highest payments but to look for companies with a history of steadily increasing their payments.

To do well with this approach, it’s essential to understand the dividend payout ratio, which tells you how much of a company’s profits are given to investors as dividends. If the payout ratio is low, it means there’s potential for the company to increase its dividend payments in the future.

Step 2: Selecting the Right Dividend Stocks

When you’re building your dividend growth portfolio, making the right stock selections is crucial.

1. Create a Set of Rules

You should consider establishing a set of rules to guide your stock selection process. These rules should be tailored to the specific objectives of your dividend growth stock portfolio.

Here’s an example of how you can structure your criteria:

Criteria	Low limit	Maximum limit
Dividend yield	2%	No specific maximum, but consider the industry average
Dividend growth rate (annual)	5%	No specific maximum, but higher is better
Payout ratio	Lower is better	75% (or below)
Earnings growth (annual)	5%	No specific maximum, but higher is better
Debt-to-equity ratio	Lower is better	Depends on the industry, but generally below 2.0.

2. Find a List of Such Companies

You should explore companies known as “dividend aristocrats”. These businesses have consistently increased their dividends for 25 consecutive years or more. This list of dividend aristocrats can serve as a valuable starting point for discovering dividend growth stocks and gaining insights into how these companies have achieved their success. It can also inspire ideas for identifying similar opportunities in the market.

Now, let’s examine the NOBL (ProShares S&P 500 Dividend Aristocrats ETF) together. Here is a list of the top 10 companies listed in this ETF, sorted by percentage.

Chart Source: EFT.com

General Dynamics (GD) is already an excellent example with a 2.2% dividend yield, a 7% dividend growth over 5 years, and a 45% payout ratio. I would add this stock to the watchlist and learn more about the business.

On the other hand, we have Walmart (WMT) with a 1.4% dividend yield, 2% dividend growth over 5 years, and a 45% payout ratio. The growth rate appears to be slower, so I wouldn’t include the company in the dividend growth portfolio without further research into its expected future growth.

3. Create a Watchlist and Monitor

After you’ve found potential dividend growth stocks based on your criteria and insights from dividend aristocrats, it’s time to make a watchlist. A watchlist helps you track the stocks you’re interested in and see how they’re doing over time. Here’s what to do:

• List your chosen stocks: write down the names of the stocks that fit your criteria.
• Get price alerts: use the price alerts to get a message when a company’s price hits your price target.
• Stay informed: keep an eye on news and updates about the companies on your watchlist.
• Regularly review and adjust: look at your watchlist from time to time and make changes if you need to.

Once you’ve done your research and think a company’s stock is a good buy at the current price, you can consider adding it to your portfolio. This way, you can make smart investment choices.

Step 3: Diversification and Risk Management

Diversification is your best friend when it comes to managing risk in your dividend growth portfolio. To reduce vulnerability to economic downturns, it’s essential to spread your investments across different sectors and industries. You can learn more about diversification here.

Consider including both established dividend-paying stocks and growth stocks that may not pay dividends currently but have the potential to do so in the future. Historically, having 10 to 20 stocks in your portfolio allows you to benefit from growth while also reducing risk.

Step 4: Reinvesting Dividend Income

Reinvesting your dividend income is a powerful way to grow your portfolio. After collecting your increasing dividends from the companies you’re holding, you can reinvest them in the companies you already own or explore new opportunities.

This strategy is advantageous because it provides you with a consistent cash income, eliminating the need to sell your existing stocks to purchase new ones.

Step 5: Monitoring and Adjusting Your Portfolio

Building a dividend growth portfolio isn’t a “set-it-and-forget-it” strategy. It’s important to keep a close watch on your stocks, track their performance, and assess their dividend growth rates. If you notice a deterioration in a company’s fundamentals, it may be time to reconsider your position.

Don’t forget to review your watchlist and add new stocks to your portfolio when opportunities arise. Over time, also consider questioning the criteria you previously selected and reassess whether they still make sense.

Tools and Resources for Dividend Investors

Any type of investor leverages various tools and resources to access financial data for different stocks and optimize their portfolios. Here are some examples for you:

• Dividend stock screeners: Utilize screening tools to identify stocks that match your specific criteria, such as dividend yield, payout ratio, and dividend growth history.
• Dividend tracking software: These tools help you monitor your portfolio’s performance and track your dividend income.
• Historical dividend data analysis: Understanding a stock’s dividend history is crucial. You can find historical data on reliable financial websites.

I use Stock Unlock as an all-in-one tool because it helps me save money by not having to pay for multiple tools.

By following the step-by-step guide, educating yourself about investing, and simplifying your life with various tools, you can create a solid dividend growth portfolio.