In Investing, Money

Investing Series: How to Build a Dividend Stock Portfolio

This is a part of the Investing Series.

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Building a dividend stock portfolio takes a lot of time. You can’t just pick a stock, buy it, and hope for the best.

You need to do your research, run numbers, wait for a good “entry point” (wait for a good price to buy it at), and make sure you keep on top of the news of these stocks so you can sell them if they start to show signs of trouble that are too much for you to handle.

WHERE I PUT MY (PLAY) STOCK PORTFOLIO IN CANADA

ANY and ALL of my stock investing for capital gains is for fun.

I am bored enough of sitting around watching the grass grow on my money to bet some of my money (a small amount) into individual stocks.

Do not buy risky items that you can’t afford to lose.

Do not buy risky items that you can’t afford to lose.

Do not buy risky items that you can’t afford to lose.

For purchasing stocks meant for capital gains, or anything I plan on keeping for the long-term to grow (index ETFs), I use my Tax-Free Savings Account (TFSA) room (the U.S. equivalent would be Roth IRA), and I am with Questrade (referral code: o0soehds).

Read: What is the difference between index mutual funds and index ETFs?

This is because capital gains are taxed at 50%, and if I were to claim losses on stocks, it’s better to have losses that can affect your taxes and lower them, rather than losses in your TFSA where they’re tax-free anyway.

For my dividend-paying stocks however, I keep them outside of my TFSA and I put them in a non-registered Margin account with Questrade.

This is because dividends are taxed favourably.


Read: How to get about $50,000 of income and pay only about $200 in taxes

HOW TO TRACK AND CREATE A DIVIDEND PORTFOLIO

After you’ve picked your stocks that you’ve settled on, you need to create a chart like the following one I’ve created for myself. It’s small potatoes in terms of income, but it’s a good idea of what you should be doing if you want to create a portfolio for yourself.

(They’re mostly Canadian except for those in red, which are American and were mostly for fun investing, not for the dividends themselves, that was just a bonus.)

Some of the stocks below are bets that they’ll turn out fine in the long-run (Energy, Petroleum), especially Just Energy, which has given me a headache, but I’m willing to ride it out.

The others like Sugar and Coffee, are fairly stable, and with banking in the U.S., it was because they were trading below book value when I bought them.

It has actually been fun keeping up with the news on these companies!

TICKER SYMBOL NAME OF DIVIDEND # OF SHARES ANNUAL DIVIDEND PER SHARE DIVIDEND YIELD EXPECTED YEARLY DIVIDEND INCOME INDUSTRY
RSI.TO Rogers Sugar 1805 $0.09 per quarter, or $0.36 a year 5.69% $649.80 Sugar
SBUX Starbucks 10 $0.21 per quarter or $0.84 a year 1.65% $8.40 Coffee
PGF.TO Pengrowth Energy 260 $0.04 every month, or $0.48 a year 9.60% $124.80 Energy
PWT.TO Penn West Petroleum 99 $0.27 per quarter or $1.08 a year 10.35% $106.92 Petroleum
JE.TO Just Energy Group 134 $0.07 per quarter or $0.28 a year 11.02% $112.56 Energy
BUSE First Busey Corp. 282 $0.04 per quarter or $0.16 a year 3.49% $45.12 Banking
ECI.TO EnerCare 2170 $0.057 per month or $0.68 a year 7.52% $1484.28 Water Heaters
Re-invested Income (DRIP): $2531.88 Per year
$210.99 Per month
Nominal Return 6.97%  Per year

Ticker Symbol:

This is what it trades under as a name on Questrade for me.

Name of Company:

Some people are so used to ticker symbols, they don’t bother with names, but I’m old school.

Number of Shares:

You can also note what price you paid for them, but I track that separately in another area to understand the capital accumulation of my shares.

E.g. I bought a few Starbucks stocks at around $50.85 after I did some research into them and their prospects for growth.

Annual Dividend per Share:

You can go online to finance sites to look for this number, but I personally prefer going to the actual company site itself.

They usually have an Investors section, and you can see all the exact DATES and amounts of what they paid out.

They pay it either by quarter, or by month, so be careful when you multiply it by 4 or 12.

Dividend Yield:

You need to re-do this calculation for the time when you plan to buy the stock

For a general dividend yield, a lot of finance sites will show this, and it’s calculated as:


Annual Dividends Paid Per Share / Price Per Share

So if you get $2.88 per share per year and the price of the stock is $63, it looks like this:

$2.88 / $63 = 0.0457 x 100 = your dividend yield is: 4.57%

However you have to do the calculation yourself because the dividend yield will change depending on what price you buy the stocks at, so you still have to do the calculation to make sure you don’t go blindly off someone’s numbers, as stock prices change frequently.

Expected Dividend Yearly Income:

Multiply your Annual Dividends per Share by the Number of Shares you own.

Industry:

Make a note of where the company sits, so you aren’t heavily invested in one area over another. I’m heavy on Energy right now, which means I need to start looking at other areas to diversify my holdings.

WHY I DON’T JUST BUY ALL OF THE HIGHEST DIVIDEND-PAYING STOCK?

It’s because I don’t want to lose everything in case that ONE company goes down.

Diversify, diversify, DIVERSIFY!

I am still working on diversifying.

That means spreading out your risk, and lowering it among different companies in the same industry, or outside in various industries, even in other countries.

Which is why I need to stop being drawn into energy companies, and work on buying others like Telecommunications and Consumer Goods.

DIVIDENDS CAN BE CUT OR REMOVED AT A COMPANY’S DISCRETION!

Please remember that dividends MAY be foregone or CUT in one, some, or many years.

You have to keep on top of your portfolio and review it ever so often to read about where you’ve put your money, so that you aren’t surprised 5 years later that you bought a stock that stopped paying dividends the following year.

This takes work, so keep on top of it, and try not to buy too many stocks, spread over too many industries so that you don’t spend hours reading on each.

So buy a stock you’d hold for the long-term.

INEFFICIENT: BUYING TONS OF SMALL BATCHES OF STOCK

I saw this one dividend portfolio where they had (I guess) over 1000 stocks, each with 1 – 5 stocks held in each company.

I mean, literally PEANUTS in each company, but the total amount of all the stocks was near $150,000 in capital invested.

O_o

(Yeah it looks like my portfolio is starting out like that, but it isn’t, I promise you.)

Just imagine all the fees that person had to pay each time, to buy 1-5 stocks each time.

I’m working on diversification and will have about 20 – 25 stocks, maximum.

I can’t mentally keep up with more than that to calculate dividend income per year, etc., and it will go from being FUN as a hobby to being something mentally taxing and frustrating.)

1000 x 10 stocks = 1000 companies you need to read about, research, keep on top of, and generally pay attention to.

Not to mention what they paid just in buying the stocks alone!!

At Questrade, it would be $4.95 per trade x 1000 stocks = $4950 just in commissions alone

If they went with TD Waterhouse, it’d be $7000 in the best case scenario and $9990 in the worst.

… all for what is basically MUTUAL FUND OR ETF investing. *headdesk*

1. With Index Fund (Mutual Funds or ETF) Investing, you get the dividends indirectly

For one thing, you can obtain dividends in a total return with index fund investing.

The myth about index fund investing is you don’t get dividends — you still get the dividends, but indirectly as the TOTAL return of the stock market takes them into account.

Fun fact thrown around: 40% of the returns of the S&P 500 have been from dividends.

You just won’t be able to get those dividends into your pocket as an income to live off on, but you still benefit.

2. With Dividend-Paying/Focused Mutual Fund or ETFs, you can get the dividends directly

Alternatively if you want the money in your pocket, here are some dividend-focused funds, but the returns are not as hot as individual stocks:

TICKER SYMBOL NAME OF ETF ANNUAL DIVIDEND PER SHARE DIVIDEND YIELD MER COST FINAL RETURN
VDY Vanguard Canadian High Dividend Yield ETF $0.04 per month or $0.48 a year 1.79% 0.30%  1.49%
XHD iShares U.S. High Dividend Equity Index Fund $0.05141 per month or $0.62 per year 2.975% 0.30%  2.67%
XDV iShares Dow Jones Canada Select Dividend Index Fund $0.07751 per month or $0.93012 per year 4.14% 0.50%  3.64%
CUD iShares S&P U.S. Dividend Growers Index Fund $0.04 per month or $0.48 per year 1.9% 0.60%  1.3%

You will notice that the dividend yield is low (Final Return) compared to what you can get investing individually, but that’s the price you pay for having a diversified holding of dividend-paying stocks without doing the work and research involved.


You can also just wait until the price drops a bit on these ETFs and buy when the yield is higher, but they tend to stay around the same price range ($20/ETF).

You can also take the shortcut and go through the list of the top 10 holdings in these funds and buying them individually.

It’s a bit like stealing the brain of whoever picked these stocks.

That’s what I’ve been doing with my fun portfolio — using these dividend-paying portfolios as a starting point of research.

Still, it is less hassle, a better diversification and with a LOT less work if you decide to go with an ETF that is dividend-focused.

……or simply, stick your money into an index fund.

Read: Where should most people invest their money?

WHY ARE YOU NOT INVESTING MORE OF YOUR MONEY?

Because:

  1. This is just for fun. I don’t plan on losing a big amount of money on individual stocks.
  2. This is just my dividend stock portfolio, and I have another one for capital gains.
  3. I don’t like rushing into stock purchases out of impulse (I have to fight this natural instinct).
  4. I don’t want to overpay for a stock just to get a dividend.
  5. I want to have cash on hand in case I see good buys so I can swoop in.

I am not adverse to investing more, but I think I might cap out at $50,000 invested in dividends, until I can get a contract and get some money rolling in.

Then I might start putting more of my company retained earnings into dividends. Or not.

I’d rather err on the side of caution and wait.

I am waiting on other stocks before buying more, because I still don’t want to overpay just to get a dividend.

Plus I can buy more stocks once I am sure my tax situation is done.

I want to (try) to get in at a good price, but not miss out on any increases if I wait too long, or get in at a time when it takes the dip the next day.

Otherwise, this is what I am currently holding, and will be diversifying more as I research into others.


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Sherry of Save. Spend. Splurge.

I got out of $60,000 of debt in 18 months using TheBudgetingTool.com. Since then, I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K (savings rate = 85%). I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I also post daily on Instagram @saverspender.

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Posted on August 27, 2012

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