How To Build A Dividend Portfolio For Consistent Returns

From choosing the right dividend stocks to calculating the dividend yield, here’s how you can create your own dividend portfolio to fill in the financial gaps.

With inflation driving up living costs including skyrocketing property prices, if your ultimate goal is to achieve Financial Independence, Retire Early (FIRE), you can’t simply rely on your income from your full-time job. 

Most Singaporeans will need to get themselves involved in investing to help make their money work harder for them and accumulate wealth.

Be it through robo-advisors, DIY investing or crypto staking, one popular investment tool is to invest in dividend stocks. Dividend stocks give dividend payouts based on their profits for the year. This essentially means creating a stream of passive income that differ in amounts depending on how much you buy and how well the stock is performing. 

If you’re new to dividend investing, here’s how you can make a solid dividend portfolio to cater to your own financial needs.

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#1 Set a realistic investment goal

Setting a specific investment goal that includes an exact figure will be useful in helping you choose the dividend stocks that you’ll want to invest in. And I cannot emphasise enough on ensuring that it’s kept realistic and to start early to leverage the power of compounding. 

If you’re aiming to reach $100,000 nett profits in a year, hold that thought. Not only would you most likely fail to reach the goal, it might also make you feel demoralised when you realise the progress that you’re making is not fast enough. 

Instead, start off with something achievable. If you’re new to dividend investing, having a small goal like reaching S$500 after a year is much more manageable.

A tip is to also peg your investment to a certain financial goal that you have in mind. Do you want your dividends to go towards paying off your personal loan? Or is this sum of money for achieving the long-term goal of an education fund for your children? 

Tying a specific financial goal to your dividend portfolio will help give a clearer picture of what you’re investing for, so you don’t end up aimless or distracted.

#2 Plan your finances wisely

The next step is to plan your finances well. While you’re assessing your financial situation, you’ll have to decide how much you can reasonably set aside as your initial capital. 

Though you may have S$10,000 worth of savings, don’t make the mistake of plonking everything into investing. Work out how much you’ll need as an emergency savings fund (experts have recommended 6 months’ worth of living expenses). If you follow the investing ratio of 15% of your income, you’ll be able to determine how much you can afford to invest, assuming you can’t touch that money in the next few years.

You’ll also have to take a look at your cash flow and calculate how much you can save per month for your dividend portfolio. These two factors should complement your investment goal to help you discern if your finances are able to support your goal to potentially achieve it.

#3 Set a criterion for the dividends you choose

When you create a dividend portfolio, you'll have to sieve through the numerous dividend stocks that are in the market. Set a criterion for the dividend stocks you would like to buy. How much yield are you aiming for? What is your risk appetite? Are the companies showing consistent growth?

One common criterion for investors is a good track record of consistent dividends. If a company’s dividends vary significantly every year, investors might be less willing to buy their dividend stocks. Consistent-growing dividends indicate that as the company becomes more successful, its management is willing to share the success with its shareholders.

Another criterion is that the company’s overall growth is sustainable. While the dividend yield is important, the company’s fundamentals are equally as important. If the company suffers from falling revenue, profits and negative cash flow, it will not be able to sustain distributing high dividends to its stakeholders for the long term. As stock prices fall, this will further eat into any dividend gains that you might have had at the start.

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#4 Create a watchlist to track their performances

Before you pick the dividend stocks that you want to buy, create a watchlist first to learn how to assess the fundamental quality of a stock by analysing its annual and quarterly reports.

With over 700 stocks listed on the SGX, you can always start off with stocks in Singapore. Create a watchlist to monitor at least 20 dividend-paying stocks, but don’t invest in any yet, as tempting as it can be. The main aim of the watchlist should be to learn how to analyse the stocks, instead of fixating on the stock prices. This helps you become a sharper investor when you eventually choose to buy dividend stocks.

#5 Calculate the dividend yield

It’s also good practice to consistently calculate the dividend yield for the chosen 20 dividend-paying stocks of your choice on your watchlist. Since not every one of the stocks is always at their lowest possible price, consider the dividend yield to sieve out the better stocks on your watchlist that you can potentially buy.

Usually, investors pick stocks that offer above 5% in dividend yields per annum, and stocks that offer dividend yields above their 10-year average. Calculating the stock’s current dividend yield and comparing it with its dividend yields for the past 10 years will help you be more aware of what counts as a “good stock” worth buying. It will also help you to decide if the stock is offering the best dividend yields at its current prices.

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Dividend investing can be relatively simple, but if you’re a newbie, it’s best to do as much research as you can. Learn how to analyse stocks and calculate the dividend yield. It may be a lot of daunting numbers and graphs at the beginning, but you’ll eventually get there.

Read these next:
What Is Dividend Investing & Best Dividend Stocks On The Market
Things You Can Do With Your Investment Dividends
Guide To Scrip Dividend Scheme In Singapore
DBS, OCBC or UOB: Which Bank Stock Gives The Most Dividends?
How to Buy Stocks in Singapore: 6 Steps to Begin Investing