dividend portfolio

I‘ve started my dividend portfolio in the middle of 2018 and at that time I was overwhelmed with the information you receive on the internet on how to do things right and how to avoid this and that. Here is a beginner’s guide to build your dividend portfolio. Over the last 1,5 years I have grown my yearly dividend income from around 127 Euro in 2018 to around 440 Euro in 2019. For 2020 I am expecting an income of around 900 Euro.

What exactly are dividends? The Corporate Finance Institute defines dividend as „A dividend is a share of profits … that a company pays out to its shareholders“. In other words, it is money that you get because you own shares of a company.

The first decision you should make before building your portfolio is if you are willing to invest the money for the long term and only the money you don’t need. The dividend strategy are for people who want to earn passive income and grow their portfolio until retirement to live then from dividends. This means you should be clear with the fact to invest your money for 20-30 years or even longer.

Not all companies paying their dividends at the same time. The most of the US companies pay their dividends each quarter, while others once per month or only once or twice per year. With that in mind it is important to create a calendar and make sure that every month you receive dividends. As of today my dividend calendar looks like this:

dividend calendar

Every month I receive between 8 – 11 payments from the companies in my dividend portfolio. If you have the right tools, you can understand how to build your portfolio in the proper way. To understand when a company pays its dividends, you can use the page: dividendstocks.cash

How Do I Know In Which Company I Should Invest?

Everyone has a different strategy on how to find the right company. For me as long term dividend investor I want to make sure that I invest in those companies who have the right strategy for the future and have their financial metrics under control. It’s very important also to invest in different industries. Some industries might perform better in one year while the others are going down. For example below you can see how my portfolio is diversified:

Important Financial Criteria’s To Check

Dividend Metrics

Dividend Yield: Of course for every dividend investor it is absolutely crucial to have the highest dividend yield possible. But it is not so easy. Companies who pays a very high yield are not necessarily the best ones to invest. A high yield can mean that the financials are not as good as they should be. So it is important to check the dividend yield %, but keep an eye on the other financials. I would start to check with a dividend yield of >1%.

Payout Ratio: Investopedia defines Payout Ratio as „The payout ratio, also known as the dividend payout ratio, shows the percentage of a company’s earnings that is paid out as dividends to shareholders“. Give me as much as possible from your earnings. Not really. A low payout ratio is what we are looking for. Because a company with a low payout ratio, let’s say <70%, is able to invest the rest in itself and grow their business. Keep in mind that REIT’s have to pay out around 90% of their taxable income. That’s why you see always a higher value for the REIT’s.

Number of years of consecutive dividend increases: If the company has a long history of dividend increases, the idea is that the dividends in the future won‘t be cut. Of course it is not a guarantee, but companies which increased their dividends over a long time get into a specific list. For example a company which increased their dividends for 25 consecutive years get into the dividend aristocrats list. If a company increased their dividends for 50 consecutive years will be in the list of the dividend kings. Those lists are what many dividend investors check first. So every company tries to avoid cutting their dividends, otherwise they are out of the lists.
I am investing mainly in companies with 7 or more consecutive years.

Dividend Growth Rate: A positive and good number of dividend growth over the last years gives hope that the dividend growth rate will also raise in the future.

Earnings And Debt Metrics

Price/Earnings (PE): According to Investopedia “A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future”. In general I look for stocks with a P/E of less than 20. For REIT’s a good similar indicator would be the price-to-FFO ratio.

Debt/Equity Ratio: We want to have companies with a low debt. The Debt/Equity Ratio helps to identify companies with lower debt. This Ratio might vary from industry to industry. My eyes are mainly on companies with Debt/Equity Ratio of <2.

Earnings per Share (EPS): The EPS is calculated by the net income after tax divided by the number of outstanding shares. Usually I do a check if there is an EPS growth Year-over-Year / Quarter-over-Quarter and if the trend for the last 5-10 years is in an up trend. Not all my stocks do fulfill this criteria. Over the next year I am working on changing that.

There are many additional metrics which should be analyzed. But if you want to get a first idea of how a company is doing, the mentioned criteria’s are a good start. Here again a short summary:

Dividend Yield > 1%
Payout Ratio < 70%
# Years consecutive dividend increase > 6 years
Dividend Growth Rate should be positive
Price / Earnings < 20
Debt / Equity Ratio < 2
Earnings per Share should be positive and in an up trend over the last 5-10 years

The pages and tools I am using to identify those numbers are:
Seeking Alpha
Finviz Stock Screener

How Do I Start My Dividend Portfolio?

The very first step before you are able to buy shares of your desired company is to open a trading account (Depot) at your bank. At the moment the bank of my trust is BNP Paribas Consorsbank. It has no fees and allows me to invest a little amount of money in each company every month to buy partial shares. This is not offered at every bank or online broker. If you are new to investing, it is a good way to start with that strategy. For example, I have 15 share saving plans. In each saving plan I am investing 30 Euro a month to buy shares of that company. So choose your bank according to your strategy. In my post Financial Freedom In Germany – How To Start Your Journey, you can also find my automatic money flow.

In the next step I am recommending to create your watchlist of companies you would like invest in. Check out their financials and dividend criteria listed above. Create your own dividend calendar. To get a first idea you can check out my stock portfolio. You have to do your own analysis. It is not a guarantee for a good company.

Ask yourself again if you want to be an individual stock picker. There are many ETF’s out there, which keep pace with the market. But if you want to make your own decisions, a dividend portfolio is a good choice. Invest in a strategy which let you sleep well during the night.

Get This Beginner’s Guide As PDF File!


The following two tabs change content below.

Mr. Financial Freedom

Mr. Financial Freedom was created by Daniel (20-something) who got inspired by many very popular money blogs. Daniel is from Germany and currently employed as a Computer Engineer and started 2 year ago the road towards financial freedom. His goal is to reach financial freedom with a 4 step plan. Check the "About" page for more information.

Latest posts by Mr. Financial Freedom (see all)

Leave a Reply

Your email address will not be published. Required fields are marked *