The 4 Secrets To Building The Portfolio Of Your Dreams

Posted On April 25, 2018 1:52 pm

This series has already looked at some of the most important aspects to good long-term investing including:

This article explains the four critical steps to building a stock portion of your overall portfolio. In other words once you have gone through the process of planning for your long-term future, including understanding your individual goals, risk profile, and optimal capital allocation, then it’s time to actually build the dividend stock portfolio that will hopefully serve as the cornerstone of your financial prosperity.

Step one involves picking the right stocks. The key here is you want to avoid taking on too much risk, by “reaching for yield”. Remember there is a big difference between a quality high-yield stock and a yield/value trap. A stock whose dividend isn’t safe isn’t worth owning. There are basically three factors that make a good dividend stock:

  • Stable cash flow that covers the payout
  • A strong balance sheet that allows the company to invest for future growth without putting the dividend at risk 
  • A good business model, (well managed), in an industry that’s growing, (not in secular decline)

Now these are just rules of thumb of course and general ones at that. As with all complex things in life there is as much art as science to selecting the right companies. So here’s a good short cut. You can just select from a predetermined list of stocks that have already been screened for quality. The master watchlist that I maintain in my portfolio summaries, (which is expanding to eventually cover every low/medium risk dividend stock traded on US exchanges), is one such place to look for ideas.

Another is the list of dividend champions/contenders/challengers, the so called “CCC” list, maintained by Dave Fish. These are stocks that have raised their dividends for 25+, 10-24 years, and 5 to 9 years in a row, respectively. In other words: well run and proven blue chips whose management is highly disciplined, conservative, long-term focused, and shareholder friendly. Step two, once you have a good idea of what the right companies are, is to make sure you buy them at the right price. After all studies have found that the number one factor in achieving good long-term returns is buying the right company at a good price, meaning fair value or better.

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, and DividendSensei.com My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 22 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams. I'm currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that: 1. Pays a 5% yield 2. Offers 7% annual dividend growth 3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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