At the end of 2016 I started seriously thinking about dividend stock investing. It was when I looked at my mutual fund dividend distribution totals for 2016, 2015, and 2014 that I realized that I really needed to make a change in how I was investing. My 2016 income was trending significantly lower than 2015, which didn’t make sense to me given my portfolio values increased (which I don’t remember the exact numbers off hand). I also realized that I had no way to estimate the dividend growth potentials.
I invested in mutual funds for the last decade or so because
- I didn’t think I could successfully pick individual stocks and
- I previously worked at a company that mandated where I could have brokerage accounts so direct mutual funds purchases were my only option for “outside accounts”; not mention they “monitored” trades.
Even though I left that company a few years ago, I hadn’t gotten around to “unlocking” the accounts.
Make sure your account allows for stock investing
Because of the previous financial services company I worked for, I had IRA accounts that could only invest in the brokerage houses’ mutual funds. I finally called them to transfer my money into fresh accounts.
And no, I’m not saying all mutual fund investing is bad. And I still own a few, but I didn’t want that to be central to my dividend investing strategy going forward.
If you have an existing account, check the commissions (for buying and selling stocks) as well as confirming that they allow for dividend reinvestment. Take a quick look around at other brokerage companies to see how yours compares. It may be worth the switch if you can find a better deal.
If you are starting from scratch, you still need to compare things like commissions, account minimums (and any fees associated), and if dividend reinvestment is supported ideally for free.
Identify your starting target dividend income
I looked at my historical annual dividend totals and set my target to my 2015 income levels. I wanted to structure my stock holdings so that I would be on target for 2017 (ish) at a level that I received in 2015. Given I missed the dividend payments for the first few months of the year I don’t think I’ll hit the full 2017 target, but the positive income trend is already underway.
Identify a target dividend income per stock (for the first year)
I also came up with an ideal target income per stock as a starting point. For example, I could have said I want to buy enough shares to start with a annual income of $100 per stock. I also targeted to distribute my available cash so that each stock would be about 5% (give or take) of my total income. This way if one stock has a problem, the impact on my total income should be moderate.
If you reinvest the dividends in that stock over time the annual income will grow (and with added growth from dividend increases). Fortunately I’m at a point where I’ve accumulated enough cash that I can (and need to) set a higher target than $100.
Build a list of possible stocks to buy
I built a huge wishlist of potential stocks to buy using sources such as the holdings of mutual funds, top writers from Seeking Alpha, and lists of long paying stocks such as the Dividend Aristocrats.
I created a spreadsheet in Google Sheets that tracks each stock’s current price, annual dividend (manually have to look that up), current dividend yield, and calculates based on the current price how many shares I would need to reach my target per stock income (i.e. $100). I also calculated based on that income how many shares that would buy at the current price. Ideally I want to add at least 1 share per year to the holding.
Prioritize and purchase stocks
This is the part I consider “moneyballing” my portfolio. I tried to focus on stocks with solid histories of revenue, dividend performance, and a high likelihood of continued dividend payments (and increasing them) in the future.
I also sprinkled in a few solid REITs, because they allowed me to hit my income target (or near target) at a lower purchase price.
For the regular blue chips, I went across industries and targeted stocks that had around a 3% current dividend yield. It’s a reasonable number without coming across as greedy (i.e. possibly unsustainable).
As a reminder, this is the way that I approached reinventing my IRA accounts based on a dividend stock investing strategy. Each person has to come up with an approach that works for them. No one has a crystal ball that allows them to know the perfect solution. I’m hoping I created an educated guess instead of pure speculation.
Ultimately I am aiming to be a long term stock holder so I looked for solid companies with long histories of paying dividends. For the stocks that where slightly more speculative, I sometimes purchased the shares with a lower investment amount, just in case the experiment didn’t work out.
So in summary these were the steps I followed:
- Switched my accounts to ones that have stock purchase capabilities
- Assembled my cash (selling existing holdings when it made the most sense)
- Set an annual starting total dividend income goal
- Set a per stock starting annual dividend income target
- Created a list wish list of stocks which prioritized purchases and calculated how many shared I needed of each to reach my targets
- Setup a spreadsheet to track total dividends received and likely future dividends
Give me a shout if you have any questions, but remember I’m a DIY investor, not an investment professional that can give investing advice.
As of September 2017
I finished updating my spreadsheet this morning as I’ve been busy the last few weeks so I haven’t been obsessively watching my portfolio. I was pleased to realized that most of my targeted September payments had already arrived and now my estimated target income is 2.5% above what I was hoping to achieve. Not too bad given I’m 8 months in to this strategy. Calculating my total account increase is a little harder and something I should start trying to figure out.