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How to Build a Dividend Growth Stock Portfolio

Did you know there is a way to earn thousands of dollars (even hundreds of thousands of dollars) every year without doing any work?

It’s called dividend investing and many people just like you earn receive large payouts every month simply by owning some of the world’s best run companies.

If you’re new to investing then you’ll want to take a moment and learn more about the power of building a dividend stock portfolio.

I’m going to break down everything that you need to know to start building your very own dividend portfolio that pours cash into your pocket month after month. 

What is a Dividen Stock Portfolio?

A dividend stock portfolio is a collection of companies that pay monthly, quarterly, or bi-annual cash distributions to their shareholders. 

These companies reward investors by paying out a percentage of the company’s profits in the form of something called a dividend.

Dividends are extremely tax-friendly and can grow tax free in certain accounts like a Roth IRA retirement account.

You receive these dividends payments automatically without doing anything. As long as you own a stock before the ex-dividend date, you will receive the dividend.

Building a dividend stock portfolio is much easier than you think. Many early retirees use the passive income from their dividend portfolio to cover their expenses in retirement.

This whole idea of this strategy works well because you can live off your passive dividend income while maintaining a strong list of established companies that increase their dividends every year.

Working until 65 is outdated. This is the 21st century. You can retire as early as 30 if you plan for it.

Here's how you can do this too!

Step 1 – Save Up at Least $100

Building a dividend portfolio takes capital but you cannot start a decent portfolio with just $5 to $10.

Investing $100 is enough to buy 1 good stock or partial shares of a well established company. Don’t worry about how much you start with. 

Your balance will grow from a small seed into a large tree. 

Step 2 – Focus on stocks with rising Dividends

Many investors use lots of complicated metrics & formulas like P/E ratio, earnings growth, debt to equity ratio, etc to gauge whether a stock is a good investment or not.

While I agree that these formulas provide much insight into a company, they are far less important to a passive dividend income investor’s long term goals.

I like to keep things simple on this blog because simple strategies last in the long run. Most of you reading this article have full time jobs and families to support. You don’t have time to become the next Warren Buffett and read annual reports all day long.

Warren Buffett recommends reading 500 pages a day to become a successful investor. For most of us, that’s not possible.

So how do we identify solid companies to invest in without spending hours and hours reading and conducting research?

We favor stocks with rising annual dividends.

Why? 

Because in order for the company to continue increasing the dividend, they must be managing the business well and growing profits every year. If a company raises its dividend but doesn’t grow its profits then they will eventually need to borrow money to maintain the dividend.

This will put stress on their balance sheet and Wall Street will notice. It’s hard to raise your dividends every year if the business isn’t growing.

So a rising dividends is the proof in the pudding. Don’t tell me the business is doing well.

Show me by paying me more money every year!

Where to find stocks with rising dividends?

The S&P 500 Dividend Aristocrats is a great starting place for any dividend investors. This is a list of companies who increased their dividends for at least 25 years straight.

Only a handful of America’s company made the list. So if you’re short on time then this is a great starting place.

I also check Dividend.com based on sector and look at the years of rising dividends. Anything above 10 years is a good sign for me.

10 straight years of increased dividends means the company is well managed over the long term. A decade is a lot of time in the stock market. Back in 2010, people were still scared to buy stocks due to the 2008 financial collapse.

Just 10 years later, we are experiencing a record NASDAQ & S&P 500 due to 10+ years of fantastic economic growth and expansion. There are more millionaires now than ever and US unemployment is at all-time lows.

These dividend aristocrats kept increasing their dividends when times were tough. That’s a great place to start looking for stocks.

Step 3 – Diversify Your Portfolio Across Different Sectors

When choosing stocks with rising dividends, I like to diversify across different sectors to spread out my risk.

A sector is a category of companies that describes the type of product/service they offer. Here’s a breakdown of the most common sectors in the stock market:

  • Services
  • Consumer Goods
  • Technology
  • Financial Industrial Goods

Right now, I have no more than 28% of my portfolio invested in one sector. Stocks within the same sector are positively correlated. If you only hold bank stocks then your portfolio is at risk if the entire banking sector does poorly.

How Many Stocks Should You Own in My Portfolio?

How many stocks you add to portfolio is up to you. Some FIRE bloggers own literally hundreds of stocks to spread out their risk evenly. 

I, personally, limit my holdings to around 20 stocks but I may change this in the future as my dividend portfolio grows over time.

Just remember that the more stock you own, you decrease risk but also decrease overall portfolio gans in the long runs. Holding hundreds of stocks means you are likely to pick some losers that reduce your returns over time.

Jim Cramer, the host of CNBC’s Mad Money, managed a hedge fund for many years and mentioned he made the most money when he owned the fewest stocks. You can check out the segment below 

Step 4 – Open a brokerage Account’

Once you have money saved up and found a few companies to invest in, you’ll need to open a brokerage account.

My recommendation for beginners is Fidelity because you can buy dividend stocks for free and reinvest those dividends automatically to acquire more shares.

Robinhood (Read my Robinhood review) is my 2nd favorite choice because they offer free trades as well.

Other alternatives are eTrade and Charles Schwab. Any one of these brokers will do the trick.

Remember, the more important factor in your dividend investing success is you. Don’t stress over the right brokerage so much.

Choose one, get started and you can transfer your assets in the future if you run into any problems.

I’ve been with Fidelity for 15 years and I think they are a great broker for investors of all ages.

Step 5 – Create a Passive Income Target Goal

Are you building a dividend stock portfolio for early retirement? What are your specific portfolio goals?

For most people, my guess is you are pursuing early retirement through a passive income dividend portfolio.

Once your passive income from your dividend stocks exceeds your annual expenses, you can quit your job.

So Let’s figure out exactly what your portfolio target goal is. 

Let’s assume you need around $40,000 a year to retire. That’s a decent budget for a family of 4 with 2 adults and 2 kids. Many FIRE bloggers spend around this amount or less during their transition from full time work to early retirement.

Find ways to reduce expenses and live under a specific budget.

Let’s say your portfolio yields around 3% annually from your dividend stocks. That means you’ll need around $1,333,333 dollars in your dividend stock portfolio.

A dividend portfolio of $1,333,333 with a 3% yield pays around $40,000 in income. Of course, you can tweak these numbers based on your marital stats and whether you have kids or not.

Some FIRE bloggers become dividend expats and move to a cheaper part of the world so they can retire with a smaller portfolio.

MrFreeat33 became a dividend expat at age 33 and retired with a portfolio of less than $500,000 in SE Asia.

His monthly expenses rarely exceed $1,5000 per month so he doesn’t need as much money to retire.

So for our example, let’s say you’ll need:

  • $3,333 per month for a western country (US, Canada, Europe)
  • $1,500 per month for a cheaper country (Thailand, Philippines, Panama)

Which option looks better to you?

Would you rather retire early in America or simply move overseas to a cheaper country?

Right now, I’m aiming for the 2nd option since I’m in my early 30’s and want to pursue FIRE before I turn 40.

However, I realize health care is much better in the Western World so I have my sights set on a large dividend income in the future. Right now, I’m watering my tree so it continues to grow.

Income from your portfolio can pay for your expenses if you allow your portfolio to grow over time.

Best of all, dividend stocks continue to pay cash even if the stock market crashes or a recession hits the country.

Your money still grows as long as your companies pay out those yummy dividends!

Step 6 – Reinvest Those Dividends Until You Reach Your Target

In the beginning stages, it’s crucial to reinvest your dividends to reach your portfolio target faster.

Most brokerages allow you to turn on DRIP within your settings. Remember to change this setting whenever you buy a new security because it’s usually set as “deposits to core account” by default.

Once you hit your target goal, change the DRIP from “reinvest in the security” to “deposit cash to your core account”. Now, you can spend that cash on your living expenses while keeping a hold of your stocks.

That’s the ultimate long term goal. Receiving thousands of dollars in cash every month via dividends without lifting a finger.

Imagine what your life would be like if you could replace your job income with dividends?

Where would you live? What would you do? Who would you become?

Step 7 – Transfer Money Automatically to Your Portfolio Every Month

This is the final step to continue watering your dividend portfolio. Most successful dividend investors add at least $500 per month to keep growing their dividend portfolio.

The more you add, the better.

But I understand telling you this straight up isn’t enough. A whopping 80% of Americans live paycheck to paycheck with no money left over to invest every month.

If you’re struggling to save money each month, check out this article to escape living paycheck to paycheck right now.

The key to building up your dividend portfolio quickly is something called automatic deposits.

Setup an automatic deposit each month from your checking account to your brokerage account every month on autopilot.

It can be $50, $500 or $5,000. Do whatever you can afford now. The reason is you don’t want your portfolio to stop growing until your reach your target number.

Every extra dollar helps you reach your goal even faster.

Step 8 – Reach Your Target Passive Income Goal

The last and final step is to finally reach your portfolio goal. Keep your job and find extra sources to income to build your portfolio quicker.

Once you reach your target goal, it's time to reconsider your lifestyle and make some changes.

Perhaps you quit your job and travel the world.

Spend more time with your spouse and kids.

Transition into a new career without focusing on your salary.

Whatever your choice is, you have SO MUCH freedom when your dividend portfolio target goal is reached.

It seems now the popular action is to quit your day job and travel the world. There is so much to see, foods to try and languages to learn.

Traveling the world is a great alternative to spending years trapped in a cubicle making your boss rich.

Really think about how you want to spend your time after reaching financial indepedence.

Conclusion

Hopefully this article will help you get started on the right path. Building a dividend stock portfolio is an awesome feat and you’ll feel very proud of your hard work once it starts to grow.

But like all things, you need money & time to see long term results.

Get started today and work towards your target goal.

If you have any questions, please leave them in the comments.

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