3 Tips on Creating a Durable Dividend Stock Portfolio with Less Work


Making money from the stock market requires buying and selling stocks. The idea is to profit from capital gains when you sell stocks for higher prices than you paid them for.

When you build a dividend stock portfolio, you can potentially reduce tremendous amounts of work by focusing only on the buying. If you want to create a durable dividend stock portfolio with less work, here are three tips for you!

Dividend stock selection

You want to select dividend stocks with durably growing dividends for your buy-and-hold dividend portfolio. Here are some examples.

Fortis (TSX:FTS)(NYSE:FTS) stock is a good example. This graph shows that through economic cycles, Fortis’s earnings have been highly stable and grow in the long run. (The earnings-per-share (EPS) line is in orange.) 

Additionally, it paid out sustainable dividends throughout. (The light line illustrates dividend-per-share (DPS).) The dividend line has always been well below the earnings line, which indicates the company has maintained sustainable payouts.

Notably, the chart gives the consensus analyst EPS projections for this year and the subsequent two years.

STORE Capital (NYSE:STOR) is another good example. Remember that for real estate investment trusts (REITs), we look at the funds from operations per unit (FFOPU) instead of EPS. The REIT’s FFOPU better illustrates the business’s earnings power and ability to maintain its dividend. 

Both Fortis and STORE Capital generate long-term stable profits because of their defensive business models. Fortis is virtually a regulated utility, which allows it to make defined but predictable returns on equity. STORE Capital is a net-lease REIT for which tenants pay at least a portion of the costs for insurance, maintenance, and taxes for the properties, which lowers costs for the REIT.

General Dynamics (NYSE:GD) is another dividend-growth stock that has a track record of sustainable dividend increases.

Valuation makes a big difference!

Buying at right valuations makes a difference in your income generation and total returns. It can be a difference of getting an initial yield of 4% versus 3.8% or total returns of 10% versus 9%. In the long run, the differences add up.

Unless a market-wide correction occurs, often you’ll find stocks in different industries taking turns being on sale. Discounts of 10% are more common than, say, 30%. The larger the pool of quality dividend stocks you are keeping on watch, the more buying opportunities you will get.

Once you buy these types of dividend stocks at good valuations, you can ignore the ups and downs of the stocks (if you choose to). Of course, you can also choose to add more at right valuations. 

Fortis management plans to increase its dividend by about 6% per year through 2025. So, if you buy the stock when it’s fairly valued at around a 4% initial yield, you would get long-term total returns of approximately 10%.

Fortis stock is currently trading well above the premium normalized valuation (the blue line). Investors cognizant about valuation should wait at least until the stock touches the blue line, which would be about $51 per share on a forward basis. 

Many dividend stocks have made a huge comeback from the pandemic market crash last year. Consequently, dividend yields don’t come cheap. 

As low interest rates have driven retirees and income investors to higher-yield dividend stocks (from bonds and other fixed-income investments), stock investors should be particularly careful of the valuations they’re paying for. 

Else, you risk paper losses in the short term or get stuck with low returns for the long term. Investors will need to carefully balance the opportunity cost of waiting and investing for the income you might need.

Be patient

Be Patient. When valuations are high, there will be fewer opportunities to buy. Wait for good opportunities to buy from the list of quality dividend stocks that you handpicked. Market corrections do occur. Seize those buying opportunities!

You must also hold shares patiently to collect the growing dividend income. Initially, dividend increases might seem negligible, but after a few years of building your durable dividend portfolio, you’ll start noticing the compounding power. 

Consider recording the dividends you receive every month in a spreadsheet. Then, you can easily tally them up for the year and compare the amount received with previous years.

Investor Takeaway

Taking the top-down approach, investors can choose to buy quality dividend-growth stocks whenever they’re trading at good valuations. By patiently building a durable dividend portfolio, you save the work from having to determine when to potentially sell your stocks. By buying and holding shares for the long term, your dividend income can only grow over time. 

Share Your Thoughts

  • Which dividend stocks are in your buy-and-hold dividend portfolio?

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Disclosure: As of writing, we own shares of FTS, STOR, and GD.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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