During his/her accumulating phase of investing; the dividend growth investor focuses on building a strong money making machine. Each month, dividend payouts are deposited into his investment account and combine this money with his current savings to enable him to buy more shares. At this point, the only question that matters is: which is the best stock for my new investment money? Should he buy more shares of an existing holding or perhaps add another company to his portfolio? In both cases; his main decision criterion will be based on his investment philosophy and the search for the best possible investment.
What is so different when the dividend growth investor becomes a retiree? In an ideal world, the new retiree should only have to change the dividend payout to be deposited into his bank account and live off its distribution. Unfortunately, life is not that simple.
A Major Problems for Retirees & Other Income-Seeking Investors
Do you know what Kimberly Clark (KMB), Wal-Mart (WMT), BlackRock (BLK), PepsiCo (PEP), Baxter International (BAX), Analog Devices (ADI), Xcel Energy (XEL), General Electric (GE) and Genuine Parts (GPC)have in common? Yes, they are solid dividend growth stocks. But they share something else in common; they all pay their dividend during the same quarters. Therefore, imagine a retiree with a strong position in these companies. He would receive the bulk of his dividend income in March, June, September and December and almost nothing the rest of the year.
If you plan on living off your dividends at retirement, you will have to follow a tight budget and hold on to your quarterly dividend payment to pass through the meager dividend months. The first problem for an income investor is that most companies don’t pay their dividends monthly, they pay them quarterly.
MLPs and other Monthly dividend stock Limited Diversification
Sure, you can always look for a list of monthly dividend stocks. The most commons are MLPs (Master Limited Partnership). Since their purpose is to redistribute an important part of their profits, MLPs usually pay their dividend monthly. However, they are heavily concentrated in the basic materials and financial sectors. Holding shares of only these two sectors is quite risky and it’s even worse for a retiree.
There are also other companies paying their dividends monthly. Once again, sector diversification may become an issue. But the fact that you have to ignore most dividend growth stocks and long-time dividend growth history payers such as the dividend aristocrats can hurt your portfolio like nothing else. You basically feed your portfolio with fast food when you could make a delicious salad with grilled chicken. This is why I’ve developed a strategy to build a solid dividend growth stock portfolio with relatively equal monthly dividend payments. I’ve done my research and built these portfolios to answer a question asked by some of my readers. I divided the process to building your monthly dividend portfolio into four segments:
#1 Make a List of All-Star Dividend Stocks
The first step is no different than any other dividend growth portfolio building method; you need a list of strong companies that will grow their dividend first. Each investor has their own “investing recipe”, mine is built on 7 investing principles I follow to succeed:
Principle #1: High Dividend Yield Doesn’t Equal High Returns
Principle #2: If There is One Metric; It’s Called Dividend Growth
Principle #3: A Dividend Payment Today is Good, A Dividend Guaranteed For the Next 10 Years is Better
Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model
Principle #5: Buy When You Have Money in Hand
Principle #6: If You Know Why You Bought, You Will Know Why You Sell
Principle #7: Think Core, Think Growth
These principles are based on several research papers I’ve read and through my own experience. The key idea is to be able to make a strong list of stocks to start selecting them. But if you have your own stock picking methodology, that is just fine. The important part is that you have one before continuing any further.
#2 Use a Dividend Calendar
Then, the monk work begins! If you don’t benefit from a paid investing service, chances are you will have to check out each company and note when it pays its dividend. By using a simple Excel spreadsheet invest a few hours with a strong coffee, you can easily achieve this task. I suggest you add the current dividend yield into your spreadsheet for the next step.
Basically, the idea is to be able to regroup companies by month. Start with quarterly paying dividend stocks as you can add a few monthly distributors at the end of the process. They won’t change much in your portfolio configuration as the quarterly payers are the ones showing a payment timing issue.
Once you regroup all companies per quarter, it’s time to move to step #3.
#3 Average Your Yield & Watch Out for Sector Concentration
This step sounds quite simple, but it requires a good mental acuity. When I did this to build the “perfect” monthly dividend portfolio, I had to choose from roughly 10-15 great companies per quarter therefore among a total of 50-60 stocks.
Then, I tried to make an average yield for a group of 4-5 stocks per quarter I could replicate in others to make sure to have an equal dividend payment. Then, once I selected my 15 companies, I had to make sure I wasn’t too concentrated in any one sector. To be honest, it was more challenging than I thought. I wanted to make sure that I didn’t prioritize the point of making a monthly dividend portfolio over the dividend growth investing philosophy. I ended-up with a portfolio of 15 stocks averaging 3.72% dividend yield and showing 8 different sectors. Most importantly, even though I’ve selected 3 consumer defensive and 3 consumer cyclical, they are not related to the same sub-industries.
Each position of my portfolio is equally weighted among my portfolio and this requires active portfolio management.
#4 Rebalance
As I previously mentioned, active portfolio management is highly recommended if you build a monthly dividend portfolio. Each dividend increase and stock value fluctuation can affect your monthly budget. I intend to rebalance the portfolio on a quarterly basis with an option to add a few dividend ETFs to smooth out the payments over time.
Here’s What it Looks Like
Here’s the example of my portfolio showing both sectors and yield to give you an idea of how it is built. I’ve hidden the ticker for respect to the members of my paid investment platform; Dividend Stocks Rocks. Each member benefits from our 14 real time managed portfolio along with 10 stock lists and our bi-monthly investing newsletter.
If you are curious about my investing services, you can check out my investment methodology, this will you explain how I build and manage my portfolios.
Good food for thought DivGuy. Thanks!
The point of your article is well taken, but actually, most of the stocks you mentioned pay their dividends in January, April, July, and October (KMB, GE, PEP, XEL, BAX, GPC.) WMT pays in Jan., April, June, and September, for whatever reason. So someone invested in this portfolio might receive a disproportionate share of income in the 1-4-7-10 months, with less in the 3-6-9-12 months, if equal amounts are invested in each company…but the main idea of your article is sound.
HEllo DC,
this is why I took those stocks as an example of a portfolio that doesn’t meet the monthly income requirement :-). Our monthly income portfolio pays an equal yield each month.
cheers,
Mike.
I have a roughly equal amount of dividends paying each month. A few I selected because one of their features (and they were good otherwise) was that it paid dividends in a month where I needed more $$
I can’t say I’ve paid much attention to a company’s dividend calendar. It’s easy enough (and probably a good idea) to keep at least a few months’ worth of expenses in cash to smooth things out and cover emergencies. Plus most people probably have regular, but less frequently occurring expenses such as car/home insurance (I pay mine annually), winter heating bills, or vacations. One could put more money aside for these expenses during the high-payout months.
I’ve been equal weighting by income and by month since I began dividend growth investing in mid 2008.
Hi Mike;
My big pay outs are Jan, Apr, Jul & OCT with smaller payouts in the intermediate months. But I do get something every month.
A good budget would make a world of difference by letting you project your money needs months ahead except for exceptional cases which hopefully would be rare.
As I approach retirement I am seriously considering a lump payout from a RRIF in January of each year rather than monthly withdrawals. This would enable me to divert the “extra” funds in to my TFSA and draw money from there. The “extra” money could be invested in more dividend paying stocks while in the TFSA.
The obvious problem with this is if there is a market turndown when you need the funds.
At any rate I still remain 100% invested in dividend paying equities and I can’t really see any reason to change that. Cash is great but it does not appreciate once it is in your pocket.
I run my RRSP’s, TFSA and non-registered investment account all in dividend paying stocks.
RICARDO
Hi Mike…Not to carry on a conversation that is essentially moot, but my point was that the article says that the stocks mentioned all pay their dividends in the 3-6-9-12 months, when in reality most of those mentioned pay in other months. Nevertheless…still a good article. 🙂
Ah! got your point, I should have wrote 1-4-7and10 🙂
I understand where you are going with this article, but I think it might be a bit misleading. Mostly because it seems to ignore one fact: If your dividends are covering your annual expenses, then it doesn’t really matter when you receive them*. I can make this statement because I assume the retiree’s spending habits don’t follow his/her income.
As an example: if I spend 48K per year as a retiree and I receive my dividend income in four quarterly installments of 12K (because all of the stocks in my portfolio pay their dividend qtrly and in the same qtr), then by definition I will have enough to live on each quarter.
*The only caveat to this is that I must choose to start my retirement in a quarter in which I rcv dividends. 🙂
What the article seems to imply is that the retiree will not be able to survive (financially) by having his/her dividends paid only four times per year. That simply isn’t true if the annual dividends cover the annual expenses.
I agree that one can plan to have dividends paid in different quarters, or even to choose holdings that pay out monthly – but I think this doesn’t necessarily need to be a heavily weighed factor when choosing where to invest. If it comes down to two companies that are pretty much equal in terms of an investment choice, and one of them pays in a quarter that’s different from the majority of one’s portfolio, then yeah, maybe choose the one with the different pay date. But I wouldn’t put pay date much above this level of decision.
I am also assuming that one is not considering living “month-to-month” in retirement, and that one has a bit of a cushion (larger is better) to help them get along (for one time expenses like property taxes, home repairs, car repairs, etc). Either that, or one takes those expenses into consideration when determining one’s annual expenses and the amount of dividend necessary to cover said expenses.
My $0.02
Hello Joey,
I understand where you are coming from, but the same rationale would apply to one’s paycheck. It would be technically be the same to be paid quarterly but we all prefer to receive a bi-monthly paycheck.
In the end, the monthly portfolio helps retirees to manage their portfolio. It be done by managing your budget, but this just simplifies the whole process.
It’s interesting DivGuy, the average yield you calculated was 3.72%. Mine is at 3.76% with more than 30+ holdings (including ETfs and other mutual funds). It seems that when you are diversified with strong dividend payers – you end up with a yield in that 3.50% – 4.00% ball park, from what I’ve seen. Further, my average DGR is a smidge above 7% (7.19% in my taxable account) which pops in closer to the 11% overall DGR + DY.
It would be extremely hard to receive only quarterly dividends of the same month, would be very, very determined to stick to the budget for sure with that.
Interesting read and thanks for posting DivGuy, great one for those looking to “spread” those dividends throughout the year, staying diversified with strong companies.
-Lanny
Hey Lanny,
since you are not close to retirement, this shouldn’t be a big issue for you at the moment. I don’t look at when my dividends are paid right now since I don’t need them. But I’m pretty sure it will change once I will count on those distribution to pay my grocery bill! cheers,
Mike.