3 Guidelines For Managing A Dividend Portfolio
If you scroll down my twitter feed, you can tell it is no secret that I prefer a dividend investment strategy over any other type of strategy. The idea of having cold, hard cash paid to me by people I have never met is too good to be true.
Another reality of dividend investing is how stress free it can be. In the past, I have tried, with mixed results, technical investing, momentum investing, daily swing trading, and other types of investing strategies. The bottom line is dividend investing requires less maintenance and much less emotional work. Trust me, waking up at 4:30 am to check pre-market news was not ideal.
One thing I did realize, however, is just looking at a dividend yield wasn’t good enough for building a strong portfolio. In the beginning, I would pick companies who offered huge yields, upwards of 10%. I would soon find out that those companies could not afford that commitment over the long term. Sure enough, those companies’ dividends disappeared and so did their stock price.
To protect myself, I created guidelines for managing my own portfolio.
1. Dividends Are a Privilege to the Shareholder
I have read hundreds of annual statements and if I can paraphrase one idea from them all is that CEO’s all believe their companies dividends will set their shareholders apart from another company’s shareholders. This is true so long as their business model is solid. Obviously, we all know business operations can go south for any company. A smart dividend portfolio builder should be aware that when business goes bad, the first thing that goes away is that free money we are getting in the form of dividends. The lesson here is if a company ever suspends or cuts dividends, I, the shareholder, will also suspend or cut my investment in the company. There is no mutually exclusive relationship here. This is a financial blog not a dating site.
2. Follow the Earnings, Follow the Cash Flow
Nine times out of ten when a company reports higher earnings and their balance sheet has more free cash, I can assume that the dividend they are paying is safe. The business is growing, and you should expect your dividends to grow with it. A company with an unstable cash account or inconsistent earnings freaks me out and sends me running to a better investment.
3. Dividend Yields Are Not Everything
As I mentioned earlier companies that have high dividend yields may struggle to pay that out consistently. I’m not saying that I don’t look for higher yields, but when I come across them I make sure the company is making the type of growth moves to support it.
In January, my financial coaching business launched. I’m super excited to educate and push people to thier next level financially. It took me years to find strategies to budget properly and invest safely. I hope to cut that time down for my students. Best part is offer the service at $20 dollars per coaching session. No commitments, no contracts, and is tailored to you.