3 Smart Ways To Add Dividend Power To Your Portfolio
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What’s the best way to pump the proven power of dividends into your portfolio?
Start by taking a step backward. Step back and take a fresh look at your financial plan. Figure out how much of your portfolio should be in dividend stocks.
If you have an asset allocation strategy, something that helps you maintain an optimum balance between stocks, bonds, and other investments, you are already well on your way.
And you’ll make even faster progress when you have a game plan you’re comfortable with. A plan that guides you, gives you some balance, and makes sure that you’ve got your portfolio tuned up to profit from the power of dividend stocks.
How Much Of Your Portfolio Should Be In Dividend Stocks?
It’s not unusual for an asset allocation plan for somebody who’s retired or approaching retirement to call for 30-40% of your portfolio to be in stocks. Go with what’s comfortable for you!
The next step… Figure out what percentage of this should be invested in dividend paying stocks. A good rule of thumb for this is to remember that income, in retirement years, is king.
Just a little planning gives you a big advantage, and all you have to do is connect a few dots. Connect projectable, dependable income to your fixed expenses and to your projected expenses.
Just doing this exercise gives you confidence and control.
And remember, dividend income to cover these expenses is how your portfolio will power your plan. But there’s something you don’t want to forget, and that something is balance.
All dividend stocks, all the time, is probably not a smart move.
Why Balance Wins
This focus on income doesn’t mean you turn your back on growth, and ignore the benefits of capital appreciation.
Everyone is living longer these days… and there is a strong case to be made for the fact that your retirement will last for quite a while, perhaps longer than you think. Because of this long life, you will be able to handle a certain amount of riskier growth stocks. You’ve got more time to ride out the inevitable ups and downs.
But to capture the maximum amount of current income, to keep those paychecks coming in, you’ll probably want the majority of your stocks to be paying dividends.
When you take a look at the long term, total return of stocks, you’ll find that most of this return doesn’t come from the capital appreciation, or the increase in share price. It comes from dividends that have been paid.
For example, a broad equity index for all decades from 1871 to 2010 delivered an annualized total return of 8.8%. 52.3% of this came from dividends.
So what’s the best way to make sure your portfolio is pulling in paychecks?
There are three ways to go.
Individual Stocks, Mutual Funds, and ETFs
A good way to start dividend investing is to find an ETF that reflects a broad market index for dividend stocks.
You can invest in The S&P 500 Dividend Aristocrats, the stock market’s collection of the most reliable and consistent dividend paying stocks. A good way to do this is through the State Street High Yield Dividend Aristocrats ETF (SDY).
Other ETFs track indices for different types of dividend stocks. If you’ve got a stronger appetite for risk, this is where to go for higher dividend yields. An example of this: Vanguard’s Dividend appreciation Index ETF (VIG).
This ETF, an exchange traded fund, focuses on NASDAQ stocks that are “dividend achievers.”
Now this is a personal point, but I’d avoid mutual funds… too often they are too expensive… it’s all those management fees.
However, there are a number of them out there… and they provide steady dividend payouts… if the manager is on the ball!
If you’re looking for diversification and weighing the pros and cons of ETFs versus mutual funds, go with an ETF.
At the end of the day, the best opportunity to maximize income comes from individual stocks. The challenge, of course, is to have a reliable way to find and evaluate these stocks. But more on that next time!
Category: Dividend Basics
