We’re having some crazy days on the market for the last month or so and it looks like we’re entering a time of slower economic growth. This new economic cycle will be a time of volatility and fewer company profits which equals less stock price appreciation. To compensate for this slower growth, investors should be looking for strong companies that return a solid 3% dividend, or more. When times get tough, money managers build positions in large dividend paying stocks and therefore there will be more of a demand for them. If there is not any growth in the stock price-moving forward after this corrective upswing we’ve been seeing for the last few years, at least I know I’ll be collecting the dividends.
Many dividend-producing stocks are our most established companies and that is why I love them. High yielding sectors are financial, telecom, energy, pharmaceuticals, and consumer goods. When you pick several great companies from each of these sectors you will be able to build a portfolio where you can always count on the dividends and diversiﬁcation. Everyone knows the saying that diversification is our only free lunch as investors! Over time these quality companies have continuously increased their distributions helping your portfolio grow.
What I do in my portfolio is quite straightforward. Find an index fund that emulates our best dividend stocks. You can pick a U.S. or Canadian top dividend index and it’ll give you a great place to start shopping for stocks. To work through an example I have chosen the XDV, which is the Dow Jones Canada Select Dividend Index ETF (exchange traded funds) from iShares. On their website they list the top 30 companies on the index with their ticker symbols. It also shows you the breakdown of sectors like ﬁnancials, energy, materials, industrials, telecom, etc.
The XDV is comprised of the 30 highest yielding, dividend paying, and average payout ratio companies in the Dow Jones Canada Total average. They had me at highest yielding! You’ll recognize almost all of the companies on the list and understand their business, which is important. Remember Warren Buffet’s rule that you have to understand the business if you’re to own the stock.
I take the largest companies with the highest yields, and history of increasing dividend payouts and build my portfolio. Or you can just buy the ETF if that works for you. Customize it to support your personal yield and risk tolerance. If a stock is yielding a higher percentage and you are convinced of their strong fundamentals, buy more shares to increase your overall yield. You have so many options with dividend portfolios. Let the dividends build up in your account and when you have enough money by more high yielding companies from the index. You can also set your account up on a DRIP (Dividend Reinvestment Program) and let it automatically buy more shares each payout for $0 trading costs. Many of the large dividend paying companies have a discount if you sign up for the DRIP program. BMO gives you a 2% discount every time your dividends re-invest in shares. As prices fluctuate you lower your average cost by buying at the lows and increasing your overall yield of the portfolio.
Building large positions of these dividend yielding blue chip stocks will also give you sophisticated trading opportunities. You can create additional streams of income from writing “covered option calls”. These are sophisticated trading strategies that are meant for sophisticated traders but if you master them you can increase your yield dramatically on your portfolio. The more you learn about money the more you can make to live your best life.
My overall idea is that by owning the dividend paying stocks outright you have the potential to make even more money and you know I love to do that. Creating a portfolio that is diversiﬁed and paying solid dividends will ensure a retirement asset to fulfill your goals and aspirations. Start paying more attention to your money and it’ll pay you back with dividends.
Have a profitable week.