Build an Income-Producing Portfolio

My Comments: I’m increasingly reluctant to suggest what anyone should do with their money. But this article is consistent with what I’m doing with mine.

The single most dramatic question when thinking about retirement is ‘Will I have enough money?’. It resonates with almost everyone sooner or later.

With so many of us living longer and longer, and with the looming threat of increased health care costs, finding ways to effective assure ourselves of a continuous flow of income to pay our bills is critical.

What’s not said here directly, but implied, is the need to keep costs down. If you want a list of what I think are great Vanguard funds to consider, send me an email.

by Miranda Marquit \ May 6, 2019

An effective way to build wealth.

One of the best ways to build wealth is to put your money to work for you. When your money does the heavy lifting, it’s much more efficient. Dividend investing is one way to build an income-producing portfolio that can eventually provide you with a revenue stream. However, building a good dividend portfolio doesn’t happen overnight – especially if you don’t have a large chunk of capital. If you’re just getting started, and hope to have a solid income-producing dividend portfolio someday, here are six tips that can help you get started.

Start with dividend-paying index funds or ETFs.

Many investors aren’t comfortable with stock picking – at least at first. If you’re not sure about your ability to choose the “right” stocks, an index fund or index exchange-traded fund (ETF) can be a good start. With dividend-paying index funds and ETFs, you get the benefit of a basket of securities that pay dividends. You have instant diversity and you can usually buy portions of shares, allowing you to build your portfolio over time. If you have the risk tolerance for it, a dividend growth fund or ETF can help you super-charge your portfolio. However, it’s important to understand that these funds can also be a little more volatile, so choose carefully.

Consider dividend aristocrats.

When looking for solid individual dividend-paying stocks, starting with the dividend aristocrat list can offer a number of good ideas. These are stocks that have increased dividend payouts at least once a year for the last 25 years. There are companies that have been increasing payouts each year for more than 40 years. There’s a good chance a dividend aristocrat is a solid company. The dividend increase may not be large, but the company has been stable enough to continue paying out at a higher level even during recessions and stock market downturns. While there’s no guarantee that payouts will continue to rise in the future, a dividend aristocrat still makes a fairly good bet.

Invest consistently.

No matter how much you can invest each month, one of the best ways to build any investment portfolio is to be consistent. Figure out how much you can put into your dividend portfolio each month and make it automatic. Many brokers offer automatic investment plans that allow you to decide which dividend funds or dividend stocks to buy with your regular investment. Get in the habit, and you’ll keep adding shares over time. Because dividend payouts are based on the number of shares you own, you’ll see increasing payouts as you keep buying more shares – whether you use index funds, individual stocks or a mix. Consistent investment can yield bigger results later on.

Reinvest your dividends.

Unless you had a large chunk of capital to begin with, you’re not going to be able to live off your dividend income immediately. The goal should be to build your dividend portfolio over time so that down the road it produces enough income to provide a decent revenue stream. Reinvesting your dividends is one of the best ways to accomplish this goal. When you get a payout, use it to buy additional shares. Many online brokers will allow you to automatically reinvest your dividends. Dividend reinvestment during the growth period of your portfolio is a vital step to boosting your long-term results and reaching your goals sooner.

Consider including REITs.

Real estate investment trusts, or REITs, are required by law to pay out a certain amount of their profits in dividends. As a result, they can make interesting additions to an income-producing portfolio. If you want to diversify the assets in your dividend portfolio, REITs can make a solid choice. Carefully consider your goals when determining your asset allocation so that you have an appropriate mix. And, of course, reinvest the dividends you get from your REITs just as you would the dividends you get from individual stocks or index funds or ETFs.

Don’t rely too heavily on yield.

It’s exciting to see a stock with a 13% dividend yield. However, while there are some solid companies and funds with high yields, it’s important to proceed with caution. In some cases, there’s a reason for a high yield – and it’s not always a good one. Perhaps a company is struggling and it offers a temporarily high yield in the hopes of attracting more shareholders. High yield isn’t always a sign of problems, but few companies can maintain such high yield indefinitely. Sometimes, a less-sexy, but more practical, yield in the 3% to 6% range is more indicative of long-term stability and potential for reasonable capital appreciation.