What to do with extra funds for a dividend portfolio?

Episode 2: Growing a Dividend Portfolio

Every $1K

Currently my dividend portfolio earns 4% in dividends every year. That means that for every $1,000 invested in the portfolio, those companies in my portfolio will pay me $40 each year just for owning their stocks. My mindset going into this is pretty simple… every $1,000 invested will pay one cell phone payment every year for the rest of my life. From here on out, I only have to pay 11 of the 12 payments each year because that $1,000 invested will take care of the last payment for me. After $12,000 is invested, I will have my cell phone payments covered for the rest of my life.

And then I just keep going down my list of expenses… electric bill, water bill, car insurance, rent, etc., until one day my dividend account covers each of my expenses. That’s the ultimate goal. By growing it to that level, I will have hit my retire-able net worth. And if I can accomplish that for my family, then we can have the freedom to work or not work. Volunteer. Enjoy passion projects. Travel. And so much more.

Decision on extra money

Our dividend portfolio is currently built on a biweekly amount transferred into the account. I then have a process to purchase dividend stocks across a range of industries. But recently we received an extra $1000 refund from one of our wedding vendors, which was outside the normal process. So I decided that I would split the amount evenly between all of the companies and ETFs that had a dividend percent over 4%. This led to extra shares purchased for 11 companies in our dividend portfolio. Using Fidelity, I was able to purchase partial shares for no commission, thus being able to spread out the $1000 among 11 companies without any high costs.

Overview of Dividend Portfolio

Stocks purchased with extra funds:

  • T – AT&T Inc – 6.95%
  • PEAK – Healthpeak Properties – 5.40%
  • IDV – iShares International Dividend ETF – 5.37%
  • IBM – IBM Corporation – 5.21%
  • ABBV – AbbVie Inc – 4.99%
  • PFG – Principal Financial Group – 4.99%
  • SPHD – Invesco S&P 500 High Dividend Low Volatility – 4.72%
  • O – Realty Income Corp – 4.56%
  • USB – US Bancorp – 4.50%
  • VZ – Verizon Communications – 4.20%
  • SPYD – SPDR S&P 500 High Dividend – 5.31%

Performance versus S&P 500:

Our cell phone bill is now covered for three quarters of the year for the rest of our lives 🙂 We are also beating the S&P 500 earned dividend revenue by $379, but losing to the gains in the portfolio by -2.28%. It was also nice to see the portfolio dividend % pop back up to 4% from the previous week, which melds well with the 4% rule for retirement.

Stock Quote

“The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.” -Peter Lynch

A company paying dividends that they consistently grow over time usually (I key in on usually because companies do misstep and cut/eliminate their dividend) means they are strong and profitable. These aspects are good to have in an investment. But largely, our dividend portfolio offers versatility in two key respects:

  1. For the time being, I can reinvest those dividends back into more investments that will also grow over time.
  2. And when we are ready to retire, we can use those dividends to pay for our expenses throughout the year.

You can get started by opening an investment or brokerage account. My favorite starter account is Robinhood. Simple interface, easy to use, and beginner friendly. You can open up an account in minutes and they will give you a free stock. Plus, if you use my link below, then Robinhood will give me one free stock too.

Click here to start an investing account!

Disclaimer: These are my own personal thoughts and opinions on investing and finance. I may own companies discussed in this post, and I may have recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you read here. Please make sure to do your own research prior to investing any of your money.

What are dividends?

Episode 1: Growing a Dividend Portfolio

Thank you Alexander Hamilton!

I am not throwin' away my shot
I am not throwin' away my shot
Hey yo, I'm just like my country
I'm young, scrappy and hungry
And I'm not throwin' away my shot.

-My Shot from Hamilton

Just finished watching Hamilton on Disney+! If you haven’t already, subscribe to Disney+ and watch it. Just amazing! Alexander Hamilton is the founder of our current financial system. Crazy to think that one man could help start something that would become this powerful across the world… the platform that allows companies like Apple, Amazon, Microsoft, Disney and many others to succeed.

The show really encouraged me to read the book Hamilton by Ron Chernow… and then I saw that it was a hefty 818 pages. It might have to be weekend read for me 🙂

Alexander Hamilton believed that a central US bank could help provide liquid capital to spur commerce and build the US into a commercial powerhouse (quite the insight). And we see this at work with the Covid-19 crisis shuttering businesses and hindering economic growth. The Federal Reserve has stepped in and infused capital into the markets and businesses to try to bridge the gap to profitability. Whether or not it is enough has yet to be seen, but the ultimate goal of a business is to become profitable, or remain profitable, even in this volatile time period.

What are dividends?

Profitability is simply the remainder of money a business has left over after all of the expenses, interest, and taxes are paid. That business, if profitable, then has two choices: (1) the business can use the extra funds to spur future growth, or (2) the business can give the owners an extra payday by sharing the profits with them. The business can also combine these two aspects and get the best of both worlds.

Most businesses that look to grow rapidly or find themselves in a highly competitive market will take the profits and reinvest 100% of them back into the business. Other companies will use a portion of those profits for growth and a portion given out to the owners as a form of payment called a dividend. And then there are some companies that are required to pay out 90% of their profits as dividends (see REITs).

So simply put, dividends are a payment from the profits of a business to its owners (or for publicly traded companies like Disney or Microsoft they are called shareholders since they own shares of the company called stocks).

Typically, dividends are paid out quarterly (every three months) to the shareholders for each share of stock they own. As of 8/9/20, Microsoft (Ticker: MSFT) will pay a $0.51 dividend each quarter for each share of stock someone owns. If I own 100 shares of Microsoft, then each quarter they will pay me $51. And each year they will pay me $204, just for being an owner of 100 shares of their stock. Combined with Microsoft’s potential stock price increases over time, this is the Muhammad Ali 1-2 combo that led me to create a dividend portfolio.

Keys to our Dividend portfolio:

  • The Dividend Portfolio is located in a taxable brokerage account. This is the portfolio that Lizette and I will live off prior to hitting the age of 59.5 when we can tap into our retirement accounts.
  • Every two weeks we deposit money into the account, using 50% of the funds to purchase specific high dividend ETFs (exchange traded funds or an investment fund bought/sold on the stock exchanges that holds multiple stocks within the fund) and 50% of the funds to purchase high dividend yield stocks of publicly traded companies.
  • There is no limit on the number of dividend stocks in the portfolio, but each stock in the portfolio is required to have strong leadership and employee satisfaction, pathways to growth, a growing dividend, a consistently high dividend payout to shareholders, and the ability to make the dividend payment in good times and bad (like our current situation).
  • The only time a sale would occur is: (1) if the stock stopped paying a dividend (something that has me hesitating to buy Disney for this portfolio at the moment because they have stopped their dividend due to the challenges of Covid-19), (2) if there are no more pathways to growth over time, or (3) if another company/ETF is believed to be a stronger replacement.

Our Current Dividend Portfolio

Stocks purchased this week:

  • Stocks:
    • JPM – JP Morgan Chase
    • HAS – Hasbro Inc
    • EXR – Extra Space Storage
  • ETFs:
    • IDV – iShares International Select Dividend
    • SPHD – Invesco S&P 500 High Dividend Low Volatility
    • SPYD – SPDR S&P 500 High Dividend
    • VTI – Vanguard Total Stock Market Index

Stocks Sold this week:

None this week.

Overview of the Dividend portfolio

The ultimate goal of this portfolio is to make more dividends from the portfolio than we would have if we had just invested in an S&P 500 index fund or ETF. A secondary goal would be to also outperform the S&P 500. We are easily beating the S&P 500 in the yearly payout of dividends, currently by almost $347 per year. Although we are losing to the S&P 500’s gains by -2.63%. Regardless, the account is still performing better than if it was placed in a savings account, and it is returning 3.94% per year in dividends. No savings account gives me that type of interest right now.

Nothing compares to a crayon drawing:

Do not purchase a stock that you cannot explain with a crayon drawing (from one of my must read investing books, Beating the Street by Peter Lynch).

If you have any initial questions, then leave them down below in the comments section and I will do my best to answer them for you.

At the least, you can get started by opening an investment or brokerage account. My favorite starter account is Robinhood. You can open up an account in minutes and they will give you a free stock. Plus, if you use my link below, then Robinhood will give me one free stock too.

Click here to start an investing account!

Disclaimer: These are my own personal thoughts and opinions on investing and finance. I may own companies discussed in this post, and I may have recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you read here. Please make sure to do your own research prior to investing any of your money.