How to Build a Dividend Stock Portfolio

Constructing
a
Dividend
Portfolio?
Read
This

1)
Dividend
Yield

Selecting
stocks
to
build
a
dividend
portfolio
may
seem
easy
at
first
glance.
But
it
is
not.
It
may
seem
easy
because
the
criterion
one
usually
applies
is
the
dividend
yield.
It
is
true
that
this
is
an
important
factor,
but
it
is
not
enough.

2)
Dividend
Sustainability
and
Consistency

What
we
are
interested
in
when
constructing
a
dividend
portfolio
is
not
only
the
amount
of
the
dividend
but
also
its
sustainability
and
consistency.
We
need
to
be
able
to
assess
whether
the
company
will
be
able
to
pay
that
dividend
and
increase
it
over
time.

Companies
that
boast
very
high
dividend
yields
might
seem
like
bargains,
but
they
may
be
too
good
to
be
true.
Such
companies
could
be
going
through
financial
problems
that
have
caused
their
stock
price
to
plunge
(and
the
yield
to
rise).
It’s
not
unusual
for
companies
in
such
situations
to
cut
their
dividend
in
order
to
save
cash,
so
their
actual
dividend
yield
going
forward
might
be
lower
than
the
currently
reported
figure.

3)
Stock
Valuation
Matters

That
a
dividend
portfolio
pays
“good”
dividends
is
important,
of
course,
but
it
is
not
enough.
It
must
also
be
able
to
offer
acceptable
capital
appreciation.
What
is
important,
therefore,
is
the
long-term
total
return
and
not
only
the
yield.
And
the
element
that
can
have
an
impact
on
that
long-term
total
return
is
the
valuation
of
the
companies.
At
Morningstar,
we
look
at
many
companies
from
a
fundamental
point
of
view
and
arrive
at
what
we
call
a
price/fair
value
(P/FV)
to
determine
whether
the
stock
is
expensive
or
cheap.
A
P/FV
above
1
indicates
that
the
stock
is
expensive
and
a
P/FV
below
1
means
that
the
stock
is
cheap.

Using
Morningstar
Indices
for
my
Income
Portfolio

I
have
constructed
my
global
dividend
portfolio
based
on
the
stocks
in
which
4
dividend-focused
global
equity
indices
developed
by
Morningstar
invest.

The
four
indices
and
their
characteristics
are
as
follows:

Morningstar
Developed
Markets
Dividend
Yield
>3%:
This
index
tracks
the
performance
of
securities
in
developed
markets
with
trailing
12-month
dividend
yield
greater
than
3%

Morningstar
Developed
Markets
Dividend
Growth:
This
index
is
designed
to
provide
exposure
to
securities
in
the
Morningstar
Developed
Markets
Index
with
a
history
of
uninterrupted
dividend
growth
and
the
capacity
to
sustain
that
growth.

Morningstar
Developed
Markets
High
Dividend
Low
Volatility:
This
index
offers
exposure
to
developed
markets
stocks
with
high
dividend
yields
and
strong
financial
quality,
while
favoring
those
with
lower
volatility

Morningstar
Developed
Markets
Large
Cap
Dividend
Leaders
Screened
Select:
This
index
targets
securities
that
pay
dividends
consistently
and
have
the
capacity
to
sustain
those
payments.
Securities
are
selected
from
the
Morningstar
Developed
Markets
Large
Cap
Index.
The
dividend-leaders
index
consists
of
the
100
top-yielding
securities
that
satisfy
the
screening
criteria,
including
Environmental,
Social,
or
Governance
(ESG)
screens
based
on
data
from
Morningstar
Sustainalytics.

I
have
analysed
the
positions
of
these
four
indices
with
data
from
the
end
of
2023
and
the
criteria
for
selecting
the
companies
in
my
portfolio
are
as
follows,
in
order
of
preference:

Some
Simple
Portfolio
Rules

Which
companies
are
repeated
in
these
four
indices?
To
appear
in
my
portfolio,
a
security
must
appear
in
at
least
two
indices.

What
is
the
total
weight
of
the
companies
in
these
indices?
I
simply
calculate
the
sum
of
the
individual
weights
in
each
index.
The
higher
the
total
weight,
the
greater
the
chance
of
being
in
the
portfolio.

What
is
the
valuation
of
each
of
the
companies
in
these
indices?
I
will
only
consider
companies
that
are
trading
at
a
significant
discount
to
the
last
price.
More
specifically,
to
be
part
of
the
portfolio,
the
company
must
have
a
Price/Fair
Value
(i.e.
a
ratio
between
the
estimated
fair
value
and
the
share
price)
below
0.85.
In
other
words,
it
must
be
trading
at
a
significant
discount
to
the
last
share
price,
at
a
discount
of
at
least
15%.

Building
a
portfolio
is
not
about
adding
stocks
indiscriminately.
It
is
important
to
consider
sector
diversification.
For
that
reason,
I
will
only
add
one
stock
per
sector
to
my
portfolio
and
each
stock
will
have
the
same
weight.
That
doesn’t
mean
that
every
sector
(we
have
11
sectors
identified
at
Morningstar)
will
have
a
presence
in
the
portfolio.
If
no
stock
in
a
given
sector
meets
the
three
conditions
above,
then
the
sector
will
not
be
represented
in
my
portfolio.

My
Dividend
Portfolio
Revealed

How
and
When
Will
the
Portfolio
Change?

I
will
review
the
portfolio
every
month
as
its
composition
may
change
monthly
for
two
reasons:
1)
change
in
the
composition
of
the
indices
and
2)
change
in
the
valuations
of
the
companies.
If
the
P/FV
of
a
company
rises
above
0.90
(remember
that
to
be
included
in
the
portfolio
the
company
must
have
a
P/FV
below
0.85)
it
can
be
a
reason
to
switch
to
another
company
whenever
there
is
another
stock
in
the
same
sector
with
more
attractive
valuations.

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