Rebalancing Your Dividend Stock Portfolio
Once or twice a year you should look at the values of the stocks inyour portfolio. You know that you needabout 20-25 stocks for adequate diversification.
So, make sure that no one individual stock makes up an oversizedposition in your portfolio. In a perfectworld, if you had 25 stocks each would be worth 4% of the total value of your howto live off dividends stock portfolio.
But, its not a perfect world. So, its good to set a maximum percentage and make sure no individualstock exceeds that maximum level. Letssay 10% for sake of argument.
What do you do if a stock starts to reach its maximum percentage? Either sell some shares and use the proceedsto buy other dividend stocks. Or, stopinvesting in it and try to increase the value of your other stocks with newmoney. That money can come from your monthlysavings and accumulated dividends.
Why I Didnt Include Stocks With The Highest Dividend Yield
Now, I didnt necessarily include those companies with the highest dividend yield.
When we were discussing which dividend stocks to invest in, I listed several criteria for choosing stocks most likely to continue paying high dividends for the foreseeable future. For that reason, Ive excluded certain stocks that might not make the cut.
For example, AbbVie has a dividend yield of 4.96%that would look good in any portfolio, right? But, they have a dividend payout ratio of 100%, which means theyre not reinvesting in building the company. That can compromise future dividend payments.
An even more extreme example is Exxon Mobil, currently paying 9.42%. With a dividend payout ratio well over 400%, theyre a prime candidate for a dividend cut or even a dividend elimination.
Strive For Diversification Among Sectors
Just be sure to have 20-25 stocks from different industries and different sectors of the stock market. For example, do not buy all your stocks from the utility sector.
Invest in several industries and sectors. Here are some examples of different sectors where good dividend-paying companies can be found:
More of these sectors are understandable on the surface.
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This Dividend Stock Offers Nice Value And Enticing Income
Manulife Financial is a Toronto-based company that provides financial services and insurance to a global client base. This dividend stock is up 11% in 2021. Its shares have jumped 14% in the year-over-year period.
The company released its third-quarter 2021 earnings on November 3. Manulife reported core earnings of $4.82 billion in the first nine months of 2021. Meanwhile, total new business value increased to $1.68 billion compared to $1.31 billion in the year-to-date period in 2020. Global wealth and asset management net inflows rose to a whopping $9.8 billion compared to $2.2 billion in the prior year.
Try Not To Over Pay For Dividend Stocks
Stock valuation We dont want to overpay for our dividend stocks. The value of a stock is important when we make our investments.
But, this is a tricky area. The best dividend growth stocks rarely come at cheap valuations.
So it is best to buy shares consistently every month. This is called dollar-cost averaging.
And, when the next bear market in stocks comes, keep buying. This is when you will get the best prices andthe highest dividend yields. If you havepicked solid dividend-paying companies, their stock prices will eventuallyrecover.
And remember, you will be living off dividends. Not ever selling your dividend stocks.
So, the only price that matters is what you pay when you buy a dividend stock. The price at any point in time after that is mostly irrelevant.
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How To Calculate Dividend Growth Rate
Now its time to calculate the dividend growth rate to gauge how much the dividend grows annually. This metric is essential to dividend growth investing because it lets us know if the dividend growth potential is worth the investment cost.
To calculate the dividend growth rate, divide the current years dividend by the previous years dividend payout and subtract one. For example, assume that XYZ company pays its shareholders a dividend of $1.04 this year and $1.00 last year, the dividend growth rate would be 4%.
$1.04 / $1.00 1 = 0.04
You can also calculate an average dividend growth rate for a historical average, such as five years. In this situation, you would sum the dividend growth rates for the previous five years and divide by five. This arithmetic tells us what we could expect if the stock continues to increase its dividend in the future.
There is no guarantee that dividend growth stocks in your portfolio will continue to grow at the same rate in the future. However, using the ADGR is a valuable metric to help gauge future success.
The Magic Of Compounding To The Rescue
For example, lets say you invest $500 per month$6,000 per yearin a growing portfolio of dividend stocks with an average return of 10%, including both dividends and capital appreciation.
Even if you never increase the amount you invest, youll have slightly over $400,000 in your dividend portfolio in 21 years. If you do increase your monthly contributions, you will reduce the number of years it will take. It all depends on how determined you are to build a true passive income portfolio, as well as the extra cash you have available to invest each month.
Now, an important part of this long-term growth strategy will be reinvestment of dividends. During the time youre building your dividend portfolio, you wont be taking any income. Instead, youll use any dividends received to buy more shares of the companies youre investing in.
This can easily be done through what are known as Dividend Reinvestment Plans, commonly known as DRIPs. They can often be set up through the broker where you hold the stock. By participating in a DRIP, dividends will automatically be used to buy more stock in the same company.
The combination of regular contributions, reinvestment of dividends, and capital appreciation will be the power behind the compounding that enables you to build a portfolio large enough to generate $1,000 per month in dividends.
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Canadian Imperial Bank Of Commerce
Dividend yield: 5.76%
The 150-year-old Canadian Imperial Bank of Commerce is a diversified financial institution that offers many financial products to the personal and business sectors, including chequing, savings, and business accounts, loans and lines of credit for homeowners, entrepreneurs, and students, as well as credit cards and investment services. They serve clients all over the world through four business units: Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets.
Common Stocks That Pay Dividends
Common stocks that pay dividends are the focus of this article.
In my opinion, this investment type is the best for living off dividends. Why? Because you get to pick the stocks that pay an appropriate dividend amount regularly. And you pick the stocks that increase those dividends each year.
So, we want to invest in and have a plan for living off stock dividends. Then, how do we find those stocks and how dowe pick them? We are going to cover thattopic now.
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Why Investors Should Add This Green Energy Stock To Their Retirement Portfolios Today
Algonquin Power & Utilities is an Oakville-based company that owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets. Shares of this dividend stock have dropped 14% in 2021 as of close on November 18. The stock is down 11% from the previous year.
Earlier this month, Id discussed why Canadians should look to target green energy assets. In Q3 2021, Algonquin delivered revenue growth of 40% to $528 million. Meanwhile, adjusted EBITDA increased 27% year over year to $252 million. Adjusted net earnings jumped 11% to $97.6 million.
This dividend stock possesses a favourable price-to-earnings ratio of 12. It last paid out a quarterly dividend of $0.171 per share. That represents a solid 4.8% yield. Algonquin offers a nice balance of value and good income for a retirement portfolio right now.
Real Estate Investment Trusts
A REIT is like a mutual fund that invests in real estate instead of stocks, but not just any real estate. REITs mainly invest in commercial property, including office buildings, retail space, warehouses, large apartment complexes and similar properties.
Whats more, theyre legally required to pay out a minimum of 90% of their income in dividends to their shareholders. Thats composed of a mix of net rental income and capital appreciation distributions from sold properties. And, to keep things simple, REITs typically pay dividends on a monthly basis.
REITs worth considering for high dividend income include the following:
- Brandywine Realty Trust current dividend yield of 7.28%.
However, be aware that the long-term price performance of REITs has not been good in recent years. Both Brookfield Property REIT and Kimco Realty Corp have seen significant declines in their share prices over the past 10 years, despite paying consistently high dividends. Brandywine Realty Trust fared the best on capital appreciation, holding flat over the past 10 years.
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The Secret To Choosing The Right Stocks To Fill Your Calendar
Dividend payments are usually predictable over time, especially when the stock has a long payment history. There are 3 common payment patterns you can use to fill your calendar.
If you start with finding one stock for each of the patterns, youll have a monthly dividend portfolio that covers all 12 months.
You can use a list of the dividend aristocrats and dividend kings as a starting point along with the NASDAQ dividend history site to make your initial selections. Then continue your research using sites such as Seeking Alpha to check on the health of the company.
A Stock And Bond Etf Portfolio For Passive Investing
Canadian Couch Potato provides two model portfolios with stocks and bonds exposure for passive investing. The idea is to buy two exchange-traded funds , each providing wide exposure to either stock ETFs or bond ETFs. The portfolio is so simple with two ETFs that you can easily tweak or re-balance the components of your portfolio. Most of the time, youre sitting on your investments. You only need to make a move if youre re-balancing the portfolio.
The traditional investment portfolio has 60% weight in stocks and 40% in bonds. However, as investors near retirement, they might want to reduce their risk by reducing their stock exposure and consequently increasing their bond exposure.
Lets say you have a $1,000,000 investment portfolio, and it was 60% in iShares All-Equity ETF Portfolio and 40% in iShares Core Canadian Universe Bond Index ETF . When youre near retirement, you can transition $400,000 out of the equity ETF to switch to the bond ETF. The result would be a 20% exposure to the equity ETF and 80% exposure to the bond ETF.
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How Often Do You Get A Dividend From Index Funds
ETF companies will detail their dividend schedules on their website. It’s best to check directly with ETF companies to see when they plan to issue dividends throughout the year. For example, Vanguard’s schedule details estimated dividends for the company’s ETFs in 2022. Quarterly distributions are common, but some companies use monthly, semi-annual, or irregular distributions.
How To Invest In Dividend Stocks
Building a portfolio of individual dividend stocks takes time and effort, but for many investors it’s worth it. Heres how to buy a dividend stock:
1. Find a dividend-paying stock. You can screen for stocks that pay dividends on many financial sites, as well as on your online broker’s website. We’ve also included a list of high-dividend stocks below.
2. Evaluate the stock. To look under the hood of a high-dividend stock, start by comparing the dividend yields among its peers. If a companys dividend yield is much higher than that of similar companies, it could be a red flag. At the very least, its worth additional research into the company and the safety of the dividend.
Then look at the stocks payout ratio, which tells you how much of the companys income is going toward dividends. A payout ratio that is too high generally above 80%, though it can vary by industry means the company is putting a large percentage of its income into paying dividends. In some cases dividend payout ratios can top 100%, meaning the company may be going into debt to pay out dividends.
The No. 1 consideration in buying a dividend stock is the safety of its dividend. Dividend yields over 4% should be carefully scrutinized those over 10% tread firmly into risky territory. Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.
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Real Cash For Living Off Your Dividends
With dividends you get real cash. You and I can spend that cash.
Or, reinvest it without touching the original investment. In learning how to live off dividends, I am going to show you how both aspects are important parts of the plan.
Good dividend growth stocks increase their dividends on an annualbasis. Dividend increases provide theinvestor with more cash flow each year.
By investing fresh capital in dividend stocks, reinvesting dividends, and receiving dividend increases you can create dividend income for life. That is the goal.
Living off dividends in retirement provides cash without the need todecide which of your assets to sell and when.
Most noteworthy, 40% of the stock markets long-term total return comes from dividends.
Heres Another Dividend Stock You Can Trust In Your Retirement Portfolio
Emera is the third dividend stock Id suggest adding to a retirement portfolio. This Halifax-based company is engaged in the generation, transmission, and distribution of electricity to its customer base. Its shares have climbed 10% so far this year. The stock has been a steady hold since late 2018. Utilities like Emera are also a great target in the face of rising inflation.
In Q3 2021, Emera saw adjusted earnings per share rise to $2.17 in the year-to-date period up 12% from the first nine months of 2020. Emera achieved solid growth on the back of increased earnings contributions from PGS and EES, as well as lower expenses. It is on track for solid earnings growth, as it moves forward with its $7.4 billion capital investment plan over the 2021-2023 period.
This dividend stock is trading in favourable value territory compared to its industry peers. It last paid out a quarterly dividend of $0.662 per share. That represents a 4.4% yield. Emera is a perfect hold in a retirement portfolio.
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How To Buy Dividend Growth Stocks
When buying stocks for your portfolio, distribute the purchase evenly across dividend growth stocks within each sector. I use dollar-cost averaging to purchase the same five technology stocks every four weeks in this example.
I spend $17 per stock for a total of $85 invested in technology. I am buying fractional shares of dividend stocks in my portfolio. The reason is that with a Roth IRA, I am limited to contributing $6,000 each year and wouldnt be able to purchase stocks proportionately without fractional share prices. Please read our guide to buying fractional shares on Charles Schwab if you need additional information.
With each investment in the technology sector, these stocks pay $2.14 in income each year. The dividend yield is 2.51%, and because this portfolio contains dividend growth stocks, the dividend yield on cost increases every year. It is not uncommon for dividend growth investors to own stocks that pay a 10-30% dividend yield after investing for multiple years.
These Are The Types Of Companies That Can Offer Retirees Durable Dividends And Potenial Growth
Data as of 3/24/21. *Annualized
Another factor to consider before pursuing a dividend-focused portfolio for retirement: Not every retiree or saver has the desire, prowess, or time to regularly focus on a stock portfolio. Using mutual funds or a financial advisor can make a lot more sense, their fees notwithstanding.
But managing a portfolio of dividend stocks works well for some investors.
The key consideration was to have a comfortable income stream and not have to liquidate any equities in my portfolio to do so, says Baker, the former aerospace engineer. I tend to go into my portfolio every day. Im retired. I have the time, and I enjoy doing it.
Dividend-paying stocks can make a lot of sense for retirees, many of whom face very difficult investment decisions, says David Katz, chief investment officer at Matrix Asset Advisors, pointing to low bond yields and rich valuations as major headwinds.
Certain dividend stocks, he says, should allow for a healthy and growing income stream and reasonable portfolio growth over time while providing some downside protection when needed.
Based on input from Katz and other financial pros, as well as our own research, Barrons came up with a portfolio of 10 dividend-paying stocks that retirees should consider.
AT& T is one of the more-discussed stocks among dividend investors, as its yield, at about 7%, is much higher than most U.S companies. A concern that many investors have is the companys hefty debt load.
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Protect Your Living Off Dividends Portfolio With Diversification
What you dont want is one stock getting too big. If the company runs into business troubles, it can blow a hole in your dividend stock portfolio.
Diversification provides protection. And if you pick the right stocks, this probably wont happen.
But it can. General Electric and Kraft-Heinz are recent examples of companies that ran into trouble and had to reduce their dividends.