The 'perfect' dividend portfolio
Tried and Tested
Lessons to be learned from the Omaha Oracle
Ahhh..the perfect dividend portfolio! Does it exist?
Probably not, contrary to the title – but we can surely aim to get mightily close to perfect.
Dividends! The magic asset that pays you even when you sleep and my personal favourite form of passive income. Because who doesn’t like to get paid for no physical effort… my thoughts exactly.
I first truly understood why the rich get richer when I read over Berkshire Hathaway’s now famous annual letter to investors. Yes I am one of this people who will actually read over an annual report! Clearly I have too much time on my hands now after quitting my $200k a year strategy consulting job.
For those interested every Berkshire annual letter dating back to 1977 are here – well worth the read for any other finance nerds like me out there.
Take one example from the 2019 letter, namely Coca Cola (ticker symbol KO). Both Buffett and his right hand man – Charlie Munger have long lauded their investment in Coca Cola and the strong fundamentals of the business.
In 2017 – Berkshire owned 400 million shares of Coca Cola, which represented 9.4% of Coke’s shares.
How much did they receive in return?, excluding any share price increases, an astounding $592M dollars in just dividends alone. Just for owning the stock.
That is mind-blowing, and not even the best part. I, similar to Berkshire, follow a buy and hold long term strategy of investing. The added benefit for stocks like Coca Cola is that dividends tend to increase over time.
If we now check the 2019 letter, Berkshire owns a similar percentage 9.3% but now receives $640 million a year. That’s an increase of $48M due to dividend increases in just two years.
This is down to Coca Cola either raising their dividend and/or stock repurchases.
That is the true power of owning dividend stocks from great companies over the long haul. Time is your best friend, as companies keep raising their dividends over time and execute share repurchases programs – you the investor get rewarded for holding their stock.
You’re passive income goes up and up every year – over a 5,10,20 year time horizon this gains you can achieve really start to accelerate.
It’s one of the key strategies I am using to achieve my retire early goal of $1.5million by age 35 and achieve financial freedom – I track my current net worth here on this FIRE blog.
Building your own Dividend portfolio
So how can you take advantage of the power of dividends? Well there are 3 basic rules I stick too – as investing in individual stocks can be risky.
Rule #1 – Diversify, Diversify, Diversify
- Rule #2 – Hold for the long term (HODL!)
- Rule #3 – Revisit rule number 1
This is the strategy I used to construct my own dividend portfolio, and it’s finally starting to pay out.
In the last 12 months I made ~$10,000 dollars in dividends. What did I say about putting your money to work while you sleep?
With 10,000 dollars I could buy at least 5,000 donuts every year in perpetuity. Just think of that, thats nearly 14 donuts a day. Ok ok, drooling stopped.
But, dividends are truly the 8th wonder of the world. In fact I am aiming for dividends to fully cover my cost of living (now approx $40k per year) within the next 5 years.
So then work becomes optional! How cool would that be…one can dream.
So what do i mean by ‘Diversify’?
Well there is a drawback to owning single stocks, you can lose your shirt on individual stocks versus investing in a broad index fund or ETF. Trust me, I’ve done this before and its not an experience I would like to repeat.
But through diversification, which is just a fancy way of investing across multiple companies and industries. This reduces your risk substantially, so even if one stock crashes, think AMC during 2020, your whole portfolio should ride the wave out.
I like investing in Dividend Aristocrats… oh how fancy. Again just another term simply for referring to companies with good fundamentals, strong credit ratings and a history of performance, together with a history of dividend increases over time.
Although there is a more formal meaning – a company that has increased its dividends for at least 25 years.
So what dividend stocks am I investing in and will continue to invest in to achieve my financial freedom goal?
Well to start, I will still invest in broad based index funds and ETF’s, these are the top 3 index funds in my portfolio.
But for individual dividend stocks I am aiming for the below allocation, which hits my goal of diversifying in strong companies (Rule #1 & #3).
And then sit back and let time look after the rest and reinvest those dividends over and over – Rule #2. HODL!
Never panic sell, if the company has strong fundamentals don’t pay attention to daily/weekly market fluctuations – that is all just noise. The toughest part for many beginner investors is watching a stock drop by 10% in a week and not being tempted to sell.
But if you can manage this, you are on to a winning formula.
So here is what I deem as the ‘perfect’ dividend portfolio.
*Disclaimer – perfect may be an overstatement as nobody can be perfect right? But you can certainly try. Also the below is a mix of both American and Canadian stocks, although your location shouldn’t matter.
*As always, I am not an expert or financial advisor, so nothing on this website should be considered financial advice. These are just my opinions, everyone is different. Always do your own research and have your own independent thought process.
Following this approach and investing in each of these 22 stocks gives me diversification across almost every industry. While at the same time investing in companies with strong earnings and fundamentals supporting their business.
22 stocks across 7 industries with an average dividend yield of 3.87%.
That means for every 100k invested I receive a dividend of nearly $4k! That is without factoring in share price appreciation that usually accompanies dividends.
Couple that with a hold strategy over the long term, will see those dividends grow every year – compounded by a dividend reinvestment plan. You see how this is going?
Financial freedom suddenly seems possible after all. The power of time and compounding!
Although there are companies who pay higher dividends in these sectors, after researching these are the companies that give a balance in line with my risk tolerance.
So what are you waiting for, start your own research and start earning money while you sleep! It will be your hardest working employee!
Are you a dividend investor? Let me know in the comments what is your process and approach along with some of your favourite dividend aristocrats.
Also take a look through my blog articles here, hopefully these will continue to help you on your journey going forward! The key is to take action!
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I am, and will continue to practice what I preach!
Catch you soon, here is to finding freedom.