Building a Winning Dividend Portfolio: What to Look For

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When it comes to building a winning dividend portfolio, you want to put together something that is likely to last for the long term. This is especially true if you plan to build an income portfolio that will help you accomplish your goals later on. Here are some things to consider as you put together a winning dividend portfolio:

Companies with consistent growth

Choose dividend paying companies with consistent growth. This doesn’t mean that it has to be explosive, huge short-term growth. All you need is consistent growth. A company that grows its earnings regularly, and has future prospects can be solid a bet, both as a dividend stock, and as a company that will see an increase in stock price over time. Also, consider companies that generate cash on their own. These are companies more likely to be able to share some of the profits with investors through dividends.

Costs

Consider the costs the company has. How does it contain them? Look at profit margins and consider companies that consistently show that it can control costs, and make wise spending decisions that benefit the company. Also, pay attention to debt. While a certain amount debt is to be expected in any business, you want to make sure that the level of debt is relatively low and manageable.

Long term performance

How long has the stock been performing well? Look at the long term staying power of the stock. It can also help to look at how much volatility the stock has experienced. You might see some dips and rises, but a solid, long term stock sees its performance smooth out over time. Don’t choose something that rockets higher in the short term, but is likely to drop dramatically as well; instead, look at long term performance.

Dividend increases

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Along with solid long term performance, a record of regular dividend increases can be desirable. Does the dividend increase have to be huge each year to matter? No. Any consistent policy of dividend increases says a lot about a company’s management and its fundamentals.

When looking at your options for addition to your dividend portfolio, it’s a good idea to consider your goals. If you are planning to grow your dividend portfolio long term, and prepare it to provide you with regular income to meet your needs, the important thing is to look for companies with staying power, regular growth, and good management. The stocks in your dividend portfolio don’t need to be glamorous, and they don’t need to make a big splash. In the case of a solid portfolio built to withstand the test of time, sometimes slow and steady can win the race.

Roundup: Updating Your Portfolio

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Are you ready to update your investment portfolio? Now is the perfect time of year to think about rebalancing, and try to figure out what you should do for next year. If you are looking for some portfolio help, here are some great insights from around the blogosphere:

  1. Fixing a Broken Portfolio: Is it OK to Sell Low?: Mike at the Oblivious Investor takes a look at how you can salvage your portfolio. Great ideas on how to tackle a disappointing portfolio and then move on.
  2. What Are You Buying?: Dividend Mantra takes a few minutes to tell you what’s on his watch list. It’s a great idea to consider what you are doing — and figure out what you should be doing next.
  3. Would You Invest Everything in a 6% Distribution Portfolio?: Over at The Dividend Guy, Mike takes a look at a 6% distribution portfolio. As part of his post, he explores Canadian REITs, and their popularity. A great analysis of different portfolio options.
  4. Ah, the real estate market…: Dividend Partisan shares his experience of finally entering the real estate market. A great look at real estate, and where it might going, as well as how to include it in a portfolio.
  5. How small investors can drip-feed into Vanguard index funds: At Monevator, The Accumulator offers some information on how you can do better as a small investor. A great method for making the most of your investment with the help of drip-feeding.
  6. Let The Dust Settle Before Getting Into Apple: Before you jump into Apple following the death of Steve Jobs, it’s a good idea to take a step back. Value Walk takes a look at how you should take a measured approach.
  7. Medtronic (MDT) Dividend Stock Analysis: Over at Dividend Monk, Matt takes a look at Medtronic. A great analysis of a stock that you might consider a “reasonable buy” as an addition to your portfolio.

Should These Companies Pay Dividends?

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All of the recent stock market volatility has stimulated an interest in dividend stocks. Many people are exploring how they can earn a stable income using dividend stocks, since they still pay out, even in a down stock market. Many dividend companies have solid fundamentals, and are cash rich enough that they can share some of their profits with others.

However, just because a company is rolling in cash doesn’t mean that it is sharing some of its good fortune with shareholders through dividends. Here are some of the most famous, cash-rich companies that hold back when it comes to paying dividends:

  • MSI: Motorola Solutions, Inc. has plenty of cash from its ventures, but doesn’t usually pay much back to its shareholders in the form of dividends.
  • EBAY: eBay Inc. is still going fairly strong, and it still has plenty of cash, even though it is famous for making acquisitions and mergers. However, the company doesn’t feel it necessary to share.
  • MA & V: MasterCard and Visa, the credit card payment processing giants, have a solid business model (nearly everyone uses their branded credit cards and debit cards) and loads of cash, but are pretty stingy with the dividends.
  • AAPL: Apple is, perhaps, the most famous of cash-rich companies that don’t pay dividends. The sheer amount of cash that Apple has would be enough to provide a generous one-time dividend for shareholders, or even set up a quarterly or annual dividend. (The company might need to offer a dividend if investors begin leaving if Apple doesn’t do as well without its visionary leader, Steve Jobs.)

These companies might do well to return some of their cash to shareholders. Even in these tough economic times, these are companies that tend to do reasonably well – and are likely to weather most market storms.

How Companies Can Benefit from Paying Dividends

One of the biggest ways that companies can benefit from paying dividends is by attracting investors. More investors means higher share prices. Indeed, dividend stocks usually do well, out-performing non-dividend paying stocks during tough economic times. This is because investors stay in because of the dividend payment, and new investors, looking for solid buys and perhaps a little income, are willing to make purchases.

A company doesn’t even have to offer a regular dividend to benefit from a short-term boost in share price. Can you imagine how excited investors would be if Apple announced that it was going to offer a special, one-time dividend? The rush to pile into Apple by the ex-dividend date would be massive.

You can probably think of several solid, cash-rich companies that you would like to see offer a dividend. And, perhaps it’s time for these companies to wake up and see the way things are going. Dividend stocks are in demand, and they are doing reasonably well. Some of these companies might do well to consider rewarding shareholders with some sort of dividend.

How Buy and Hold Should Really Work

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One of the essential strategies of dividend investing for stable income is buy and hold. When you are investing in dividend stocks, and you expect to build an income portfolio based on these stocks, you, by definition, buy these stocks and hold them for long periods of time.  However, it is important to understand that buy and hold investing isn’t about buying and then holding forever. It’s about buying and holding until the stocks in question no longer meet the requirements you have set for your income portfolio.

Why Buy and Hold Works for Dividend Investors

The main point of buy and hold investing is that you look for a stock with staying power. It should have solid fundamentals, and a certain amount of steadiness. A stock with good fundamentals, including competent management, reasonable profit margins and decent market share, is likely to make it through stock market downturns and difficulties.

Additionally, a good buy and hold stock often (but not always) makes a good dividend stock. A company on solid footing is not likely to cut dividends at the first sign of trouble in the stock market. Indeed, it is more likely to stay the course, aware that, over time, these short term fluctuations tend to even out a bit. This means that your payout is likely to keep coming, even during a recession or a stock market crash. Just look at the dividend aristocrats: These are stocks that continued increasing payouts, even during recessions, for 25 years. Some dividend aristocrats have been following this model for more than 40 years. It makes it fairly clear that these are stocks that do reasonably well, with solid performances over time, and well worth holding on to.

When to Sell a Buy and Hold Stock

Of course, even with some buy and hold stocks, the time comes to let go. Buy and hold doesn’t mean clinging tenaciously to a stock to the point of folly. Instead, it means holding on until it no longer makes sense to do so. As your goals change, you might need to shift your holdings. Additionally, you should also pay attention to the fundamentals of the stock. A change in the fundamentals may mean that it is time to sell a specific stock. This makes sense; then you can the money and invest in something else that makes more sense for you in the long term.

Frequent trades can eat into your earnings, and can cause problems when you are trying to build an income portfolio. Instead, you are better off saving money on commissions and making moves based on fundamental analysis, rather than making panic trades because of a stock market crash. Plus, you are more likely to meet your income goals over time with a buy and hold strategy. Choosing solid stocks to invest in, and building up your portfolio, will provide you with a better chance at creating a stable income stream as opposed to always changing what you hold in your portfolio.

Interesting Dividend Plays this Week: REITs and Telecoms

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Safe havens are popular in times of volatility, and the last couple of months definitely qualify. Lately, with the news scaring investors with big drops one day and large gains the next, many are turning toward companies with strong fundamentals and potential for regular income. REITs are gaining in popularity again, and cash-rich telecoms are attractive, since some of them have solid fundamentals.

Here some of the bright spots this week:

  • RAS: RAIT Financial Trust has been improving its situation steadily since the real estate market crash. The yield is 7.1% with an annual dividend of 24 cents per share. The current quote is $3.39, so you could buy quite a lot if you think real estate will make a comeback, and profit handsomely if you are right.
  • NRF: NorthStar Realty Finance Corporation is all about real estate debt portfolios. The yield is hefty, 12.1%, so some might be wary of this REIT. The annual dividend is 40 cents a share, and the current quote is $3.31.
  • CHL: China Mobile Limited is currently yielding 4.22%. This large China telecom has the potential for strong growth as China’s middle class expands. You’re not going to get CHL for as cheap as the REITs though. Right now it’s trading at $46.60.
  • T: Some think that AT&T might be worth getting into at $28.57. The company is still cash rich, and offers a yield of 6.08%.
  • TEF: A large telecom providing services in Europe and Latin America, Telefonica S.A. is a Spanish multinational that has fairly solid fundamentals. The current price is $20.14, and the yield is a rather large 10.30%.
  • RCI: Canadian telecom Rogers is has been struggling a little recently, but it still has cash, and solid fundamentals. The yield is 4.31%, and the current price is $34.55. Not bad.

As you can see, it can pay off to look at foreign companies as well as domestic companies. Many of these foreign companies are showing a certain amount of financial solidity.

Roundup: FINCON11 and Dividend Growth Index

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Over the weekend, the Financial Blogger Conference took place in Chicago. There were quite a few bloggers there, including bloggers that write about dividends. Here are a few posts from attendees, as well as those who didn’t attend. Plus, plenty of news on the Dividend Growth Index, picked by bloggers:

  1. Dividend Growth Index Results: It was a true pleasure to meet The Dividend Guy over the weekend, and hang out. And to read about the results of the Dividend Growth Index. Look over the list. It might be just what you need to boost your portfolio.
  2. Stock Picks for the Dividend Growth Index: Dividend Ninja (cool guy; met him at the conference) describes his three picks for the Dividend Growth Index. Learn more about the index, and why he picked the stocks he did.
  3. Evaluating Vanguard’s New LifeStrategy Funds: Oblivious Investor is personable in real life, and just as helpful as on his blog. Read about his evaluation of Vangaurd’s latest fund offering. Insightful analysis, as always.
  4. Dividend Monk’s Three Picks for the Dividend Growth Index: Read about Dividend Monk’s contributions to the Dividend Growth Index. Find out how he narrowed it down to only three choices — and why he picked what he did.
  5. Michael Lewis on The Daily Show with Jon Stewart: Watch this episode of The Daily Show, featuring Michael Lewis. Value Walk shares the episode, which addresses bankrupt countries around the world.
  6. Dividend Income – September 2011: The Passive Income Earner keeps it real by sharing his dividend income last month. A great post for catching up — and finding inspiration in your efforts.
  7. I’m Back!: Dividend Partisan has been away, doing a military training exercise. I’m sure we all missed him while he was gone, and it’s great for him to be back, and share his insights from the exercise.

Choosing Dividends: A look at the fundamentals

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When choosing a dividend stock, there are plenty of things to consider. Indeed, you want to carefully consider different aspects of a stock before adding it your dividend portfolio. So, while you are considering dividend yield, and P/E ratios, don’t forget, too, to consider the fundamentals of a company.

Looking at the Big Picture

It’s true that at dividend can say a lot about a company. However, a company can also have a lot to say about how likely the dividends are to remain stable, see increases, or see cuts (or elimination). Look at the big picture for a company, it’s fundamentals, to get an idea of what might be coming next for its dividends.

Fundamental analysis, when you are looking at a stock, is about more than just how the stock performs day to day. The technical aspects of the ups and downs in short-term price action don’t really figure in to fundamental analysis. Instead, the idea is to take a look at items that are likely to affect the overall stock performance over time.

Some of the factors to consider when you are looking at the fundamentals include:

  • Management: Who is in charge of the company? Are the top people capable? Do they make good decisions? Has the company management been relatively stable and consistent over time? A look at the way a company is managed can be quite telling.
  • Profits/earnings: Take a look at a company’s profits and earnings. This doesn’t need to be a full on analysis; simply look at the trends, and whether the company has been able to maintain decent profits over time.
  • Growth potential: Does the future look reasonably bright? What’s the company’s potential for growth? In some cases, even if the growth potential for a company is relatively weak, the fact that it will see steady growth (even if it is small) can be a bonus. Take a look at where the company appears headed over time.
  • Balance sheet: Also, take a look at the way the company handles its cash flow. How much money is coming in? Can the company handle its debt load? A company whose balance sheet requires constant adjustments, and that seems to show a growing debt load might be a bad call.

Why it Matters to Dividend Investing

These fundamentals can be useful in choosing dividend stocks, since they offer insight in how well a company is likely to hold up over time. Those companies expected to thrive are more likely to continue to raise dividends over time, consistently. A company in trouble, though, may need to slash or eliminate dividends. If your fundamental analysis of a company shows that it could be struggling soon, it may not be the best idea to invest. After all, if you are looking for stable cash flow from your dividends, a company with poor fundamentals may not be the way to go.

Before you decide on a course of action, make sure that you will be getting what you need from the dividend stock. Make sure the fundamentals are strong.

The Canadian Telecoms

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The Canadian Telecommunication companies such as Bell (BCE-N), Rogers (RCI-N), Telus (TU-N), and Shaw (SJR-N), are exceptional dividend paying stocks. As a U.S. investor, you can take part in four of Canada’s largest communication companies which will pay you a generous dividend yield. More importantly, you can buy these top Canadian companies without having to worry about foreign content rules, since they are all traded on the NYSE.

These are established and large cap companies, and for the most part are well managed. BCE and Shaw Communications however have accumulated more debt throughout 2010 to 2011, in large part due to acquisitions and service upgrades, among other reasons. Telus is the exception, with lower debt and a reasonable dividend payout ratio, and in my opinion the best of the Canadian telecoms to invest in.

Why Buy Canadian Telecoms?

If you aren’t investing in Canadian Telecoms, then you may want to consider them, even with their higher debt. These giant blue-chips are hybrids between technology and communication companies, and therein lay their strength and economic-moat. They are really utilities which actually own, maintain, and operate the communication infrastructure throughout Canada.

They make their money through cell-phone sales, cellular contracts, internet service providing, and basic telephone or cable services. Since these companies already have the infrastructure in place, and maintain it, the profit is in each subscriber – and a hefty profit it is. Canadians’ have learned to love but hate their telecoms, with their high fees and less than stellar customer service. But at the end of the day (like banks) people are left with little choice but to use them.

While it’s a very competitive sector, telecoms are more stable then tech only oriented companies. It really doesn’t matter whether the iphone, blackberry or android phone prevails. And it doesn’t even matter if the iPad wins over a Samsung tablet. Since the telecoms own the infrastructure, they simply provide access to wireless services, and sell end users cellular contracts with the latest phones or devices. It’s a win for telecoms regardless of what new hot product is out.

How Wide is the Moat?

The economic moat for these Canadian telecoms is extraordinary. Canadians pay some of the highest cell phone fees in the world!  Obviously that’s bad for Canadian consumers, but translates into profit for shareholders.  Many people believe the CRTC (Canadian Radio-television and Telecommunications Commission) governs the cell phone industry in Canada, but they do not. The cell phone industry in Canada is largely unregulated. As a result the big players (Telus, Bell, and Rogers) have pretty well locked down any competition and charged whatever prices they see fit.

Even with the smaller players such as Wind Mobile entering the stage, and undermining the cellular pricing market, the big three telecoms have held their ground. The reason is simple, the big three telecoms in Canada aren’t just cell-phone providers. They are diversified and well established communication companies with huge capital and resources available to undermine their competition.

How Resilient are the Telecoms?

During the recent market correction at the beginning of August, the Canadian telecoms performed remarkably well compared to other sectors. Looking at the beta of these companies, the answer becomes obvious. Any beta value below 1.0 means the company is less volatile than market index it is a part of. Therefore for most investors, a lower beta is preferable. As compared to the NYSE, Bell (BCE-N) has a beta of 0.771, Rogers (RCI-N) has a beta of 0.679, Telus (TU-N) has a beta of 0.453, and Shaw (SJR-N) has a beta of 0.597. These telecoms have a low volatility with a good dividend yield.

Bell Communications (BCE-N)

Bell (BCE Inc.) is Canada’s largest communications company, with over 30.17 billion in assets. BCE provides cellular service, both satellite and cable television, internet service, and of course phone landline services.  BCE currently trades at US $38.80 per share, has a PE Ratio of 15.11, and a debt-to-equity ratio of 101.31. The dividend yield is currently a very generous 5.4%, but the dividend payout ratio (DPR) of 80.93% is high for a big blue chip.

According to a recent Globe & Mail article, BCE has raised its quarterly dividend six times (a cumulative 41 per cent) since the fourth quarter of 2008. While most Canadians are enamoured with their biggest telecom, I have not purchased BCE because of the high DPR and high debt load, both increasing since the start of the year.  Nonetheless, BCE is a favourite among Canadian dividend investors.

Rogers Communications (RCI-N)

In second place for market cap among the Canadian telecoms, is Rogers Communications with a market capitalization of 20.73 billion. Rogers is Canada’s largest provider of wireless services, and also owns Fido (previously Microcell Communications). Rogers also provides cable TV, internet, and phone services. The company also provides broadcasting services, magazines, and sports entertainment. Rogers currently trades at US $37.93 per share, has a PE Ratio of 14.54, but with a very high debt to equity ratio of 266.01. The dividend yield is 3.80% with a dividend payout ratio of 54.78%.

Telus Communications (TU-N)

Telus Communications is Canada’s third largest telecom with a market capitalization of 15.98 billion. Like its competitors, Telus provides internet, phone, and provisions an extensive wireless service across most of Canada. It currently trades at US $49.25 per share, has a PE Ratio of 14.33, a debt-to-equity ratio of 88.94, and a dividend yield of 4.50%. The dividend payout ratio for Telus is 64.5%. In my opinion the solid DPR and lower debt, make Telus a preferable investment in Canadian telecoms, as compared to BCE and Rogers.

Shaw Communications (SJR-N)

Shaw Communications provides telephone, Internet, and television services as services primarily in British Columbia and Alberta (we use Shaw at home). Shaw has come under heavy criticism for its $69 million-dollar pension to former CEO Jim Shaw, its purchase of CanWest Global, and its family run board that leaves shareholders without voting rights.  It is one of the smaller telecoms with a market cap of 9.37 billion. It currently trades at US $21.52 per share, has a higher PE Ratio of 18.81, and a higher dividend payout ratio of 80.7%. It also has a higher debt to equity ratio of 166.7. Shaw is a monthly dividend payer, and with a yield of 4.30%, makes an interesting investment for income oriented versus growth oriented investors.

Roundup: Learning Curve

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We all have a learning curve to go through, in life and with money. As you learn more about money, and work to improve your ability to build wealth, you can get a little help along the way. Here are some great articles from around the blogosphere, addressing different points on the learning curve:

  1. Dividend Dad How I Show The Importance of Money To My 6 Year Old Son: The Dividend Guy offers a great look at teaching children the importance of money. This is a great process to help kids learn.
  2. What Happened to the Income Trusts? Part – 1: Dividend Ninja takes a look at income trusts. You remember those? Whatever happened to them? A great overview of where investing is headed.
  3. Seth Klarman’s Top 5 Dividends: If you want a look at some of the best dividends, Dividend Monk offers a peek at what guru Seth Klarman has. And don’t forget to check out the holdings of other greats in this series.
  4. Why A Low Payout Ratio Is Important: As you begin dividend investing, it’s important to make sure that you understand the implications of payout ratio. Dividend Mantra explains that sometimes a stock with a low payout ratio is the way to go.
  5. Are Roth Accounts Overrated?: Many people like Roth retirement accounts. Even though you pay taxes now, you don’t have to pay taxes on your earnings. However, Oblivious Investor takes a look at the possibility that they might be overrated.
  6. Saving Your Money Vs Investing It: Are you concerned about your money? Should you build up savings, or invest? Buy Like Buffett takes a look at saving and investing, and helps you figure out what might work best for you.
  7. Financial goals: Sticking to the plan when the funk comes to visit: Monevator points out that you can’t just abandon your plans when something unexpected happens. Stick to the plan, even when you might feel a little out of sorts.

Using Income Funds for Diversity and Revenue

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One of the ways that you can build up your investment portfolio is to look into income funds. Income funds provide you an opportunity to build a revenue stream, as well as add a little instant diversity to your portfolio.

What Are Income Funds?

Income funds are fairly straightforward. They represent a collection of investments that provide income. These can include dividend paying stocks, bonds and other investments that provide income. Many people find income funds attractive because it provides them with a source of income, while at the same time providing some sort of diversity. Many income funds look to dividend aristocrats and “safer” bonds like Treasuries when choosing what to include in an income fund.

It is important to note that most income funds are not going to show a lot of growth. They are not constructed to provide you with high earnings, but are instead meant to provide steady income. If you are looking for get rich quick investments, income funds usually aren’t the way to go. Instead, these funds are created to provide as stable a cash flow as possible.

Using Income Funds to Your Advantage

There are two main ways that you can use income funds to your advantage:

  1. Create a source of income: The first, obviously, is to create a source of income for you. You can build up your investments in income funds over time, so that you eventually have enough shares to warrant larger payouts. Many people nearing retirement put a chunk of their nest egg into income funds in order to receive a regular payout – even as the value of the investment theoretically increases.
  2. Reinvest dividends to build wealth: Another option is to reinvest your earnings in order to build wealth. Many income funds are set up so that proceeds you receive are automatically used to buy more shares. This means that you are basically getting free shares. This can increase what you own at a much quicker pace. This way, when you decide to start receiving payouts rather than reinvesting, you own more shares and receive more. Additionally, this can be a way to build the number of shares you have so that you get more if you decide to sell your investment later.

If you follow the reinvestment route, you can improve your retirement nest egg by keeping your fund in a qualified retirement account. You can receive a tax advantage by combining your income fund with your retirement account. It’s a great way to build your nest egg while reducing the amount of wealth eroded by taxes.