Setting up a dividend portfolio takes time but once it’s up and running, you’ll enjoy the fruits of your labor for years to come. Investing isn’t easy. There are a ridiculous amount of investing options. Some great. Some meh. And some downright dangerous for your wealth. I’ve come to see dividend stocks as one of the safest ways to be in the market. Dividend stocks can be bid up in a low interest rate environment and that is cause for concern. But if you choose stocks that are growing their dividends at an above-average rate and buy with a margin of safety, you’ll do fine in the market.

I’ve been mostly selling stocks for the last year or so. I’m doing this because I’m no longer finding good deals. There have been only a handful of stocks that have come across my radar that I will invest in. The rest is in cash and waiting for a good opportunity. Opportunity being a market correction or individual stocks that get beat up. I’d like to add stocks in my core portfolio over the next year or two.

Setting Up Your Portfolio to Pay You Bi-Weekly

One of my favorite things about investing in individual dividend stocks is the ability to control when they pay you dividends. I like to look at dividend pay dates to see when I’d like to be paid. For example, Aflac pays investors dividends quarterly on the first of the month (March 1st, June 1st, September 1st, December 1st). A $10,000 investment in Aflac will result in a quarterly dividend payment of $57.50. That dividend payment will increase over time.

dividend portfolio

Let’s see what it looks like if we add a stock that pays a dividend on the 15th of the month. Home Depot fits the bill. They pay dividends on a quarterly basis on March 15th, June 15th, September 15th, and December 15th. Home Depot will pay you about the same as Aflac at $57.50 per quarter.

retirement income generation

An investor who owns both Aflac and Home Depot will get paid on the 1st and the 15th for 4 months out of the year. You see what we’re doing here, right? We’re setting up a portfolio that pays us when we want to be paid. Retirees may find this especially beneficial since they depend on their portfolio to generate income. They need to take their dividend income to the beach and treat their grand kids to ice cream at the boardwalk.

Dividend Portfolio Example

Now let’s set up a dividend portfolio that pays us frequently. A good starting point for stock selection is the S&P 500 Dividend Aristocrat List. These are stocks that have raised their dividend for the last 25 years in a row and are also a member of the S&P 500. I took the 2017 Dividend Aristocrat List and put in in Excel for you to download at the link below. You can also access this spreadsheet as a Google Sheet here.

I have all the Dividend Aristocrats listed in the first column. Then next to that I have a random generator so that you can pick stocks from this list at random (I’m doing it for the purposes of this article to illustrate. I don’t pick stocks at random for my personal portfolio). To use the random generator, simply click in any of the cells in column C and hit F2 and then enter. Double clicking a cell in this column should also work.

I ran the random generator and picked the first 20 stocks that it came up with (see the second tab and below). I copied these stocks in from the first tab and pasted them in the second tab Column C as shown below. Then I input all my assumptions: $500,000 in principal invested, 20 stocks total, input the dividend yield of all the stocks and the first dividend pay date. A formula drives the rest of the pay dates so no worries putting that in. I then sorted everything by “1st Pay Date” oldest to newest. This is what a 20-stock Dividend Aristocrats Portfolio looks like:

dividend aristocrat portfolio

I’m trying to show just how easy it is to set up a portfolio of dividend stocks that, in aggregate, pay you bi-weekly throughout the entire year. It’s one of the big advantages to owning individual stocks. You get to pick when you’d like to be paid. Not many investments are like that. I chose 20 stocks for the sample because I think this represents a good number of stocks to A.) be well-diversified and B.) space out your dividend payments evenly.

An investor who puts $500K into this portfolio will be getting paid multiple times per month from different companies. For the sake of time and simplification, we’ll just say the investor will be paid dividends twice a month throughout the entire year. These dividends may come from 4 companies in a single day. But overall, the payments will be spread out of the quarter pretty evenly. The below chart shows the companies that pay at about the same date. You can see pretty clearly how the pay dates are spaced out.

dividend aristocrats by pay date


And here’s what your pay checks would look like if you held this portfolio. See the subtotal amounts by stock pay date grouping under the “Quarterly Payment” field heading.

dividend aristocrat subtotals

Your first paycheck for the year is on January 1st and totals $515 (ADP, Wal-Mart, Coke). Your next paycheck is paid out on January 15th for $370 (ITW, Franklin, Cardinal Health). You can see that the 1st and 15th of the month is covered giving us a stream of income that is similar to a paycheck from a regular job. The only paycheck I see in this random simulation that is relatively low is on March 1st. It comes in at only $137. If I were the investor on this portfolio, I might look for an additional stock or two that pays on the 1st of March.

You can put any stocks in this spreadsheet along with the associated dividend yields and pay dates to see what your portfolio would look like. I used a random selection of 20 dividend aristocrat stocks to make this portfolio. You may want to find your stocks somewhere else.

Finding Dividend Stocks for Your Portfolio

The hardest thing for me right now is to find stocks that represent a good value. I hate paying too much for a stock. It’s very difficult to figure out just exactly what the price of a stock should be. I use the discounted cash flow model to evaluate companies. I look at other things too. Does the stock have a decent dividend yield? Or is the stock at least growing its dividend at an above-average clip. Is the market discounting the stock because of a legitimate concern or is it irrational?

One place I like to go to screen for stocks is the Google Stock Screener tool. You can also go to Finviz for a screener. Here’s what I found for stocks that pay over 4% yield and are a member of the S&P 500.

stocks over 4 percent

The first 20 stocks sorted by market cap are listed above. You’ll probably recognize most of the names on this list. Notice the slant toward REITs, telecoms, utilities, and oil & gas companies. These stocks tend pay more money to shareholders but they don’t generally raise their dividends very quickly. I like some of the names on this list but I would be careful chasing high yield stocks. You can get burned on these sometimes, either through dividend cuts are a secular decline.

I’ve developed the Dividend Performance Indicator (DPI) to help you decide which stock to choose. The DPI is simply the dividend growth rate times the dividend yield. The higher the product of these two numbers the better. Unless of course the company is in some sort of economic trouble. I like a DPI of at least 30 as shown in the heat map in the chart below.

Good DPI: For example, a 3% dividend yield combined with a 10% dividend growth rate gives you a DPI of 30. We want a dividend growth rate of at least 10% if the current yield is 3%. A 10% growth rate would produce a 4.65% dividend yield after 5 years.

Bad DPI: A stock that yields 3% and has a 5-year dividend growth rate of 4% would have a DPI of 12. This is too low. At a 4% dividend growth rate, your 3% dividend yield would only grow to 3.65% after 5 years. You need a better deal than this.

It makes sense to look for companies that are paying out a 1% dividend as well as those paying out 5%. Diversifying across sectors is also key. You don’t want all of your holdings to be in REITs.

Growth Is The Most Important Factor

Most new dividend investors are lured into higher-yielding stocks – some even downright dangerous options that yield in the teens. A dividend yield over 6% is a huge warning sign to me. Why didn’t the market bid the stock up and take the yield down? What’s wrong with the company? Is it going to cut its dividend? These are some of the thing you’ll want to ask yourself prior to buying these sort of stocks. I don’t care as much about a high yield.

I like GROWTH. I’m talking dividend growth. Sure, I like the company to grow revenues and earnings. This is all well and good. But I want a company that increases their dividends at a high rate. A couple of years ago, Apple was selling for $92 a share and was yielding a little over 1%. Two years later, the stock is at $150 and is yielding almost 3% on your original cost. That’s the kind of dividend stock I want in my portfolio. I want to be paid later.

When I set up my portfolio of dividend-paying stocks, I want to my dividends to double in the next 7 years. That’s the goal. I need a 10% dividend growth rate to achieve that goal. You won’t get that kind of growth rate in REITs and utilities. I’m okay holding limited amounts of the slow growers. But you need to think outside the box a bit and get the next big dividend stocks.

If you do want to juice your returns without increasing risk, you could sell covered call options against the stocks you currently own. I’m a huge fan of covered calls if you’re investing in low yielding stocks (under 2%). You could increase the yield to 10% without taking on additional downside risk. The big risk here is that your stock increases substantially and then gets called away from you at a lower strike price. But again, you choose the strike price you’re willing to sell the covered call at.

Good luck building your portfolio and let me know how it’s going. I’d love to chat about which stocks you’re putting in your portfolio.