I have a couple of different investment accounts. One of them is my boring retirement account, an experimental portfolio I mostly play around with, and a few other portfolios made up for different reasons.
It is important to be extra careful when you are building a portfolio of individual stocks.
Some prefer to stick strictly to ETFs. VOO is a popular example. Some are taking on more risk and seeking alternative investment as the prediction returns seem lower than what they like.
A lot of people who start being intrigued by stocks are intrigued by the dividend portfolio. The desire is usually to have enough where they can have the passive income to fund their life better.
There are other different investment strategies though we can start with the dividend investor.
The Dividend Investor
If you were the type of person who built a portfolio where you were chasing the high yields, you might be kicking yourself now if there was a recent dividend cut because of pandemic profit loss issues. Super high yields are nice until the company proves unable to pay them.
There are rules for building a proper portfolio about purchasing stocks and when to sell stocks. There are also rules on holding stocks.
1 . When to Buy a Dividend Stock
The usual criteria to focus on when picking the best performing blue chip companies are things like how long they have been paying out their dividend, their payout ratio which should be low, their P/E ratio which should also be low, moderate yield, and many years of proven consistent dividend growth.
- Long Dividend History
- Payout Ratio is low
- P/E ratio is low
- Moderate Yield
- Proven Dividend Growth for Many Years
Some people try to offer specific numbers like generally looking for a dividend below 4%. But each company needs to be evaluated differently based on the different factors at work.
GE, for example, cut their dividend down really low. The general opinion for many is that right now is a good buy for them as they will work quickly to restore their dividend numbers back up and for now they can be acquired at a discount. Best advised to do your own research and draw your own conclusions.
Disney also cut their July dividend for 2020 to conserve cash due to the pandemic. There too many people have decided to buy the stocks at a discount because they have faith in the company and figure dividend activities will be restored once things return to something close to normal.
They say holding their Disney is their lifelong play so they are buying as usual.
These are not my own stock suggestions. These are just examples of how one might think when evaluating if a stock is a good fit for their portfolio for a long plan.
2. When to Sell a Dividend Stock
This is the most important part of investing in stocks. Knowing when to sell is critical for ensuring good return on investment.
What is the general criteria to sell?
Many dividend investors bail out when a company does a dividend cut and they have little faith the dividend will be restored in a timely manner. You sell when there is no dividend and in normal conditions the company is proving itself to be functioning poorly.
Things are a little unusual in that department given our pandemic years. I’m a firm believer that every company needs to be assessed and carefully analyzed and doing 100% this or 100% that isn’t always the best course. The dividend cuts happening 2020-2021 in many cases are the result of unprecedented market conditions.
When market conditions improve many of the previously high rated companies tend to bring back their dividends and the quality stocks appreciate nicely.
Some people during such times are all gleeful because they were able to buy up during market lows and get a bunch of discount stock.
3. When to Hold a Dividend Stock
You hold for as long as you can once you have made your selection. Never invest money you might need to be there in 5 years time because your positions might be really high or they might sink down really low like what happened March of 2020 for a brief period of time.
Invest money into stocks when you can ride out the storms because stocks go up and stocks go down. Sometimes they go way down and it hurts when you open the portfolio to see all your holdings are red.
It is really hard to watch the value of your previously nice portfolio drop to extreme lows. What happened in 2020 is somewhat the same as what happened back in 2008. Most long-range people kept investing like normal and ignored the day to day change in their portfolio. This is probably the best course currently in 2021 and beyond.
Right now is a good time to relax and hold. The dividends for the solid companies will mostly roll in all the same. The best outlook is that companies are either able to increase their dividends or at the very least maintain their payouts.
As long as a company is maintaining their dividend it is acceptable to continue holding those shares.
Stay the Course and Don’t Get Spooked
Many people fresh into investing can’t handle market volatility. They see their stock in the red and get an impulse to sell. The stock going down into the red might actually be the best time to buy.
People can’t handle risk and they get scared. None of it matters if you understand the flow of the company and flow of the market. If you have time to ride it out then things should be pretty good.
Recently there was some article where a financial advice type man was talking about a company and said it was poor to look at because it had a huge debt load. The thing he didn’t explain was of course the company had a huge debt load in the short term because it acquired a new company.
I looked at it myself and the parent company took on temporary debt to acquire a new asset that should (and did) rapidly increase its growth and profits and had decent returns for me. People have a hard time thinking about the world a few days into the future and an even harder time thinking 1 or 2 years out.
If I’m picking single stocks for any reason I might try to imagine how my companies might fit into the world 5-50 years out as that will be the bulk of my short and long investment window.
Keep in mind this is somewhat impossible to do with complete accuracy because the game changes all the time. I’ll sit around and ask myself questions. Will people still be using toilet paper in 50 years? Will they still have to go to the pharmacy to buy medication? Will normal meat farming get phased out and will the market shift to lab-grown meat?
I’ll even sit around and try to predict new inventions or possible innovations that will make a company lose a competitive edge. The more you think about, the more you see or can at least guess. Though the future is wiggly and you can’t always predict things. Some things are just logical and some things are not. Other things are just irrational.
My best bit of advice is to listen to what other people have to say about things. Just make your choices alone as you slowly increase your investment knowledge. Do your own study, your own research, and decide if a company’s stock fits your own individual strategy.
Then set your investments to be automated and check on them every 6 months. Of course, keep the news coming your way so you can keep on top of company news or dividend cuts. Otherwise, don’t fret about the day to day activity in there.
My Own Progress
I’m hesitant to put all of my own numbers out there just yet. As what I have now doesn’t really matter.
I want to run an experiment of building some accounts from scratch within a few years as I’m hoping to be able to demonstrate to people how they can go from poverty to comfortable riches in little time. I’m investing small amounts into stocks, ETF, and crypto.
Important to note that my portfolio is not dividend heavy and is centered around growth
I’m my results with these public accounts will inspire people and honestly, it isn’t very inspiring when you go to someone’s page and their advice is, “Haha, I’m rich. Stop being poor. Look at all my money” and then give little advice on how to get this all started.
This is a brand new portfolio I’m rebooting that we can track on here. This is my starter amount and the plan is to add money routinely and keep watch on how quickly this new account grows.
I’ll save the analysis for this portfolio for a different post.
It should be noted that generally young investors during their growth phase will have better performance when they hold dividend stocks in a tax-sheltered account. There is also such a thing as tax-exempt dividends like if you invest in municipal bonds or a mutual fund that deals with tax-exempt investments.
In any case, one should always factor in how their investments will be taxed and try to act accordingly to plan around it.
Other investors may want access to the money and put off the key retirement accounts like their 401k or Roth IRA or even their HSA.
Some young investors these days might ignore dividend stocks entirely if they are focused more on aggressive portfolio growth and aren’t seeking regular paybacks.
They go into it thinking that the company they are acquiring for $30 can be ridden up into something more like $3,000. Often this works out well if the company is solid and the market is in their favor when they want to cash out.
The only truth here is the market is volatile. Investing purely in growth stocks means you only get the gain if the stock is valued up highly at the time you want to sell it.
If some unforeseen market event occurs you might lose 5-10 years of unrealized gains, this is vs a dividend stock that is regularly paying you back along the way.
The dividends are something tangible that can be reinvested and used to buy more shares of something, collected, and used to pay for new projects or bills. It is something you permanently get back and set for that time.
Also, regardless of the day-to-day activity of the market, there is still an income stream being fed back as long as your position is healthy enough to honor dividends.