Thursday, December 4, 2008

Dividend Portfolio Investing for monthly income

After you have selected the dividend growth stocks that fit your selection criteria, it is time to research their payment dates. Most dividend investors try to create a monthly dividend income stream when creating their dividend portfolios. The problem with this strategy is that most stocks send the checks to their stockholders quarterly as opposed to monthly. In order to create a monthly income stream an investor has to limit their portfolio only to stocks which pay a dividend every month, or try to include stocks which pay quarterly dividends whose payment schedules do not overlap.

Another issue that our investor could experience is properly weighting the stocks in his/her portfolio. I am a firm believer in starting out with an equal weighted portfolio, since this strategy doesn’t favor an individual stocks or group of stocks by initiating an above average sized position there. This would distort the levels of dividend income that the investor would receive every month, unless of course stocks that have similar yield and growth characteristics are selected, which is very unlikely.

The dividend investor could achieve a smooth initial monthly income stream by overweighting lower yielding stocks and underweighting higher yielding ones.

Add to this the fact that dividend growth investors need to create a portfolio with at least 30 stocks in order to reduce systemic risk and the things start looking even more complicated. Yet another issue is sector diversification – investors who were overexposed to financials in 2008 experienced a lot of dividend cuts, which set them several years back from reaching their dividend income goals.

Let’s apply the principles that we learned about in a sample portfolio consisting of 3 stocks, which have different payment schedules. The stocks are ADP, JNJ and PG. ADP pays dividends every January, April, July, and October. PG pays dividends in February, May, August and November, while JNJ pays dividends in March, June, September and December. You could check my analysis of ADP, JNJ, and PG here, here and here.

If we start out with $30,000 divided equally between the three stocks, and purchased everything at the closing prices for 2007 we would have:

224.57 Shares of ADP
136.20 Shares of PG
149.93 Shares of JNJ

Our Dividend Income by month in 2008 assuming an equal weighting would be:

The initial yield and the dividend income are not big initially. This sample dividend growth portfolio however could increase your dividend income over time.
Full Disclosure: I own shares of JNJ, PG and ADP
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