Sunday, 2 October 2016

How to start a dividend portfolio.

A couple of friends asked how I started constructing my portfolio. In this post, I will set out my thoughts about how I think about constructing a dividend growth portfolio. 

Constructing a dividend portfolio is not a very difficult thing in my mind. It requires some basic research and due diligence to set up, some discipline to implement and follow the strategy and then ongoing monitoring to ensure suitable progress of the business you invest in. The key thing I try and look for is dividend growth rather than just dividend yield.

So where do you begin?

Large cap  dividend  stocks  


I believe that these should be the anchor points of the portfolio. Large cap growth stocks tend to have a solid dividend yield of at least 3% and a proven ability to grow this dividend over long periods of time, at a minimum of at least inflation if not higher.
The majority of my own portfolio is comprised largely of these stocks. They tend to have less volatility and steady and consistent growth. In fact, the total return from these dividend payers is generally comprised the initial yield that they pay plus the rate of increase in the dividend.
The types of Large cap growth stocks that fall into this category are once such as Unilever (AMS:UNA), Munich Re( Muv2),  Danone (Epa:BN), AbInbev (EBR:ABI),
If you are new to investing or just starting out with a dividend portfolio, you should likely source most if not all of your dividend income from these stocks.
Large cap growth stocks will be characterized by many years of dividend growth, good consistent increases in revenue growth, earnings growth and operating cash flow growth. They will also have sustainable competitive advantages which may be in the form of a strong, well recognized brand, solid intellectual property or some type of network effect.

International dividend stocks


For those that are feeling more comfort with their investing, it can be well worth your while to add some international dividend exposure to the mix. This can be valuable for a few reasons, particularly stronger economic growth overseas as well as favorable exchange rate consequences. Many economies overseas have been experiencing higher rates of growth than the EURO and the dividend growth from some of the dividend payers in these economies is indicative of that.
Also, many of the emerging  economies will experience an appreciation of their exchange rate versus the EURO over time as their economies grow and attract additional investment. So investing in an international dividend stock from an emerging economy can not only give you higher organic rates of dividend growth, but you will also be able to ride an exchange rate tailwind over the years.
There are a few considerations to keep in mind with international dividend stocks. If you invest in emerging markets like China you could face government interference.
Also the tax consequences can be a little messy, particularly if the country doesn’t have a tax treaty with the country you live in. Since I live in Belgium I get double taxed on a big part of my portfolio since most stocks are listed on a foreign exchange.
Examples of stocks worth considering in this category are Nestle (VTX:NESN), Novaritis (VTX:NOVN) and of course the known American dividend aristocrats like Coca Cola, Pepsico, ExxonMobil.

Low Yield/High growth dividend payer

While I prefer dividend stocks with higher dividend yields, it can be worth your while to look at slightly lower yielding dividend stocks with high rates of dividend growth, particularly if you have a long term horizon. Over time, these stocks will rapidly increase their dividend income paid by virtue of the rapid growth they experience.
Visa(NYSE:V) is one of the stocks that I hold in my portfolio that fits into this category. While its current yield is much lower than I would ordinarily prefer, the fact that Visa has been growing its dividend so rapidly, and will likely continue to do so into the future makes this stock an interesting one for me to continue to hold.

Mid cap and small cap dividend payers


Dividends from this category of stocks, while probably the most risky, can get you the highest rates of dividend growth over an extended period of time.Most of the time this wil be stocks on your local exchange. In Belgium you will find these stocks in the Bel Mid and Bel Small index, and even the stocks in the Bel20 are most of the time Mid caps according to international standards. The advantage is a lower coverage in the media and lesser analyst reports so you can find some hidden gems if you do your homework. For example I have Sofina(EBR:SOF) and Van De Velde (EBR:VAN) in my portfolio. Sofina has been raising its dividend since 1956 and paid a dividend since the early 1900's and Van De Velde has little to no debt and the pay out almost al of their profit.

How did you start your dividend portfolio? Did you also start with the large caps?

Full disclosure: Long Unilever, Munich Re, Ab Inbev, Coca Cola, Pepsico, ExxonMobil, Visa, Sofina, Van De Velde

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