As a recent college graduate entering the working world, there are a number of new considerations which run through my mind. Graduate school, paying off student loans, buying a car, buying a house….the list goes on. Albeit all of these decisions involve spending money (a lot of it) a college student doesn't have, my plan to reach the coveted million dollar portfolio via dividend growth investing remains solid. While I've occasionally traded throughout college, typically with a 1-6 month holding period, I've been meaning to start a long-term DGI portfolio for some time...and now's that time. I plan on building a $10,000 DGI portfolio over the next several months, using the following criteria.
- Dividend yield of approximately 3% or greater
- Market Cap: $5B or greater
- Consistent dividend payments for at least 10 years
- Companies with sustainable/proven business models
After screening all of the companies I tried to evaluate and pick a best in breed from a particular sector. For example AT&T (NYSE:T) vs. Verizon (NYSE:VZ) was one of the situations where both companies met my criteria. I'm fairly indifferent between the two as they are trading at very similar valuations. I chose to go with T for the additional half percentage in yield this telecom returns.
When it came to adding Enterprise Product Partners (NYSE:EPD), I had a tough time not substituting for the 7+% yielder in Energy Transfer Partners (NYSE:ETP). I ultimately decided to go with them as they've been consistently growing their dividends over the past five years (29% increase since 2007), whereas ETP has become somewhat stagnant as of late.
Building a solid dividend growth portfolio doesn't have to be a complex task, rather it should be exciting without letting greed take over. Using the above criteria and following the process above, I've decided to include the following companies and allocate the $10,000 accordingly: AT&T , Altria Group (NYSE:MO), Enterprise Product Partners, Realty Income Corp. (NYSE:O), Merck & Co. (NYSE:MRK), The Clorox Company (NYSE:CLX), General Electric (NYSE:GE), Intel (NASDAQ:INTC), McDonalds (NYSE:MCD), and Norfolk Southern Corp. (NYSE:NSC).
As a young rookie investor, I've found that patience is the key to long term success and being able to "stay in the game." Whether it's patience in building a long-term dividend paying portfolio or making a single trade, patience is essential in both. Patience in making a trade or building a portfolio can be drastically altered if one doesn't keep their emotions in check, which is why I try to develop a strategy before every trade. In order to properly execute this long term strategy, I plan on starting and adding to my DGI portfolio as follows:
- In addition to starting the portfolio above, I will invest an additional $500 a month. With an average portfolio yield of 4.1%, this will add an additional $20.51 in annual dividend payments (assuming the above remain constant).
- Continue to evaluate all holdings and not simply be long every stock initially purchased. If better opportunities present themselves or one of my holdings seems to be heading in an unfavorable direction, adjustments can be made. Just because I'm starting the DGI portfolio doesn't mean I have to die owning a particular security and remain loyal if the company begins to underperform. Too many investors become attached to an investment they've made and even if their original position turns extremely sour, they just can't let go. I need to develop an exit strategy to a dividend portfolio that doesn't affect the long-term goal (living off dividends).
- Holding % benchmark: While I may favor one security over another in my portfolio, I don't want to be too heavily weighted to one stock. With an initial portfolio having 10 securities, I won't allow my largest position to represent more than 15% of my total portfolio value. As I add additional holdings and build my portfolio, my goal is to eventually have my largest holding be somewhere in the 5%-8% range. Investors who are heavily positioned in one or two stocks could be compared to a basketball player who can only drive the ball to the basket with their right hand. While that player may be great with their right hand, they're useless once the defender recognizes their weakness - it's just a matter of time. Likewise with a dividend investor, while that one security may be great and have an excellent track record, it can't be solely relied on to "carry the team."
As I start to build my dividend portfolio, I just want to keep it simple and not try and over-think the market. A great dividend portfolio is like a great team, one player can't consistently carry the team, but a group that works well together will be more successful over the long haul. I'm looking forward to starting this portfolio and turning it into an all-star team!