How to Build an Optimal Dividend Portfolio

Jeremy BiberdorfBy: Jeremy Biberdorf

February 15, 2018February 15, 2018

How to Build an Optimal Dividend Portfolio

Building a successful dividend portfolio has significant benefits over the long-term. I LOVE the prospect of investing in high-quality stocks at reasonable valuations and getting PAID to wait until valuations have approached market value. By building an optimal dividend portfolio, you combine both the prospects of residual income and long-term capital appreciation through an increase in the share price in one single strategy. I call this the dGARP (or Dividend Growth at a Reasonable Price) strategy. To have an optimal dividend portfolio, you need a mix of dividend growth, blue chip, value and high yield stocks under one umbrella.

How to Build an Optimal Dividend Portfolio

Building an optimal dividend portfolio requires a diverse skill set, you need to understand a variety of business models and valuations to make your portfolio diverse, stable and successful.

First, use our set of criteria to find undervalued dividend growth stocks. This will help narrow down a list of high-quality dividend stocks to choose from or to evaluate further. After you input all of the identified criteria, you should have a list of stocks no more than 20-40 dividend growth stocks to evaluate further. I like to sort my list of stocks by lowest Price to Earnings ratio just to give me an understanding of the lowest priced stocks. From there, you should invest in 4 high quality dividend stocks after you have done the following checklist:

  • You understand their business model. How do they make money?
  • You’ve done research on the industries the dividend stock operates in. Is the industry forecasted to grow? What is the company’s market share?
  • Do you genuinely like the company’s products? Do people like the product and company?

What about international exposure?

To diversify your dividend portfolio further, you should seek out international dividend stocks or dividend growth funds. You may be able to screen for a few international dividend stocks through the criteria above. However, a good way to get diversified international dividend exposure is to seek out a global dividend growth fund. With the rise of Exchange Traded Funds (ETFs), it is now easier than ever to get diversified exposure to a basket of stocks or an index at a very low cost. Here are a couple of my favorite international dividend growth funds that feature ample liquidity and reasonable expense ratios.

  • iShares International Select Dividend ETF
    • Expense ratio of 0.50% and total assets of $2.7 billion
  • WisdomTree Emerging Markets High Dividend ETF
    • Expense ratio of 0.63% and total assets of $1.2 billion
  • SPDR S&P International Dividend ETF
    • Expense ratio of 0.45% and total assets of $876 million

Why should I care about fees with my dividend portfolio?

To build an optimal dividend portfolio, you need to pay the least amount of fees to trade and invest. No one likes unnecessary fees. Fees can erode your investment returns over the long haul. If you manage a small portfolio or are starting small, the fees will be a larger percentage of your investment amount further eroding your potential gain. Look for brokerage accounts that offer little to no cost per trade. This is another reason why investing in international dividend funds. Many brokerage accounts out there have partnerships with the ETF providers to offer commission-free trading on ETF products.

What about high yield dividend stocks?

In addition to including 4 value dividend stocks and 1 international dividend growth fund, you should include a high yield dividend stock to your portfolio. These high yield dividend stocks include Master Limited Partnerships (MLPs) or Real Estate Investment Trusts (REITs). Both are high yield stocks since they are required to pay out all (or nearly all) cash flow to their investors. These types of stocks are great forms of owning real assets since both usually make investments in infrastructure such as apartment complexes, pipelines (for MLPs), hospitals, hotels and more. This is a great way to further diversify your portfolio and earn additional income along the way.

Conclusion to Building an Optimal Dividend Portfolio

With our guidance you should own the following types of stocks in your dividend portfolio for optimal results:

  • 4 high-quality, undervalued dividend stocks using our dGARP criteria outlined above (note: ensure you do not have any overlap in industries among these 4 stocks)
  • 1 international dividend growth that will provide diversification and a basket of international companies to ensure a broader, global effort on diversification
  • 1 high yield dividend stock such as an MLP or REIT

With these tips, you should be able to build an optimal dividend portfolio that will provide ample income, diversification and long-term capital appreciation potential. If you want help on what I think are high-quality, undervalued dividend stocks are… Well, I think these 7 stocks are great investment for a secure retirement.

Please let me know your comments below. I would love to hear from you!

Author Bio: Millionaire Mob is a blog focused on things that we truly enjoy: Travel Photography, Travel Rewards, Passive Income, Dividend Growth Investing and Personal Finance advice. I hope to provide the best advice to help you learn and grow along the way. Join the mob of financial freedom experts and escalate your life.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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