How To Build A Dividend Portfolio From Scratch That Yields More Than 4% (2024)

How To Build A Dividend Portfolio From Scratch That Yields More Than 4% (1)

Investment Thesis

The objective of today's article is to demonstrate how you could build a dividend portfolio from scratch that provides you with a Dividend Yield of more than 4%. To illustrate this, I will use The Dividend Income Accelerator Portfolio, which I am currently constructing and sharing here on Seeking Alpha, as a practical example.

The current composition of The Dividend Income Accelerator Portfolio not only stands out for its reduced risk level through its extensive diversification across sectors and industries, and its inclusion of companies that pay sustainable dividends, it also effectively integrates both dividend income and dividend growth.

Two strategically important key components of this portfolio are Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) (with a Dividend Yield [TTM] of 3.45% and a 5-Year Dividend Growth Rate [CAGR] of 13.92%), and iShares Core High Dividend ETF (NYSEARCA:HDV) (with a Dividend Yield [TTM] of 3.74% and 5-Year Dividend Growth Rate [CAGR] of 4.70%).

Both ETFs are crucial for implementing the portfolio's investment approach, given their combination of dividend income and dividend growth, in addition to their lowered risk profile, which leads to an elevated chance of positive investment results for investors.

Due to the current composition of The Dividend Income Accelerator Portfolio, its Weighted Average Dividend Yield [TTM] presently stands at 4.31% and 5-Year Dividend Growth Rate [CAGR] at 8.37%.

The Dividend Income Accelerator Portfolio's reduced risk level is reflected in the following characteristics:

8 out of the 16 individual companies that are presently part of the portfolio exhibit a 60M Beta Factor below 1. Three companies boast 60M Beta Factors below 0.6 (British American Tobacco with 0.33, BHP Group with 0.57, and Johnson & Johnson with 0.58), indicating a significant contribution to reducing portfolio volatility.
14 out of the 16 individual companies have a Payout Ratio below 80%, and 9 firms exhibit a Payout Ratio below 50%. This not only indicates a reduced probability of a dividend cut but also potential for dividend growth.
14 of the 16 companies have shown a positive 5-Year Dividend Growth Rate [CAGR], once again, underscoring the companies' potential for dividend growth. Five companies have shown double-digit 5-Year Dividend Growth Rates [CAGR], further highlighting the portfolio's growth potential.
The portfolio is extensively diversified across companies, with no single company representing more than 4.18% of the overall portfolio (even when allocating SCHD and HDV across the respective companies in which they are invested in).
The portfolio is extensively diversified across sectors and industries, with 10 from the 11 sectors representing less than 13% of the overall portfolio.
A geographical diversification is also present, with 90.5% of the companies coming from the United States and 9.5% from outside the country.

The Dividend Income Accelerator Portfolio Presently Consists of the Following Positions:

Schwab U.S. Dividend Equity ETF
Realty Income (NYSE:O)
Philip Morris (NYSE:PM)
Royal Bank of Canada (NYSE:RY)
Apple (NASDAQ:AAPL)
AT&T (NYSE:T)
Mastercard (NYSE:MA)
Main Street Capital (NYSE:MAIN)
Johnson & Johnson (NYSE:JNJ)
Bank of America (NYSE:BAC)
Ares Capital (NASDAQ:ARCC)
BlackRock TCP Capital (NASDAQ:TCPC)
British American Tobacco (NYSE:BTI)
iShares Core High Dividend ETF
BHP Group (NYSE:NYSE:BHP)
Microsoft (NASDAQ:MSFT)
Nike (NYSE:NKE)
Exxon Mobil (NYSE:XOM)

The Dividend Income Accelerator Portfolio

The Dividend Income Accelerator Portfolio's objective is the generation of income via dividend payments, and to annually raise this sum. In addition to that, its goal is to attain an appealing Total Return when investing with a reduced risk level over the long term.

The Dividend Income Accelerator Portfolio's reduced risk level will be reached due to the portfolio's broad diversification over sectors and industries and the inclusion of companies with a low Beta Factor.

Below you can find the characteristics of The Dividend Income Accelerator Portfolio:

Attractive Weighted Average Dividend Yield [TTM]
Attractive Weighted Average Dividend Growth Rate [CAGR] 5 Year
Relatively low Volatility
Relatively low Risk-Level
Attractive expected reward in the form of the expected compound annual rate of return
Diversification over asset classes
Diversification over sectors
Diversification over industries
Diversification over countries
Buy-and-Hold suitability

Overview of the Companies/ETFs That Are Part of The Dividend Income Accelerator Portfolio

Symbol	Company Name	Sector	Industry	Country	Dividend Yield [TTM]	Dividend Growth 5Y	Number of shares	Acquisition Price per Share in $	Total Acquisition	Current Price per Share in $	Market Value in $	Current Allocation
SCHD	Schwab U.S. Dividend Equity ETF	ETFs	ETFs	United States	3.45%	13.92%	13.3761	74.83	1000.93	77.07	1030.90	32.92%
O	Realty Income	Real Estate	Retail REITs	United States	5.52%	4.28%	1.8185	55.54	101.00	55.42	100.78	3.22%
PM	Philip Morris	Consumer Staples	Tobacco	United States	5.64%	3.15%	1.0552	95.71	100.99	91.21	96.24	3.07%
RY	Royal Bank of Canada	Financials	Diversified Banks	Canada	4.07%	6.24%	1.0936	92.36	101.00	98.21	107.40	3.43%
AAPL	Apple	Information Technology	Technology Hardware, Storage and Peripherals	United States	0.49%	6.59%	0.5867	172.14	100.99	194.17	113.92	3.64%
T	AT&T	Communication Services	Integrated Telecommunication Services	United States	5.46%	-5.97%	6.8036	14.84	100.97	17.18	116.89	3.73%
MA	Mastercard	Financials	Transaction & Payment Processing Services	United States	0.54%	17.92%	0.2544	396.96	100.99	436.8	111.12	3.55%
MAIN	Main Street Capital	Financials	Asset Management and Custody Banks	United States	6.06%	3.58%	2.4876	40.6	101	45.58	113.38	3.62%
JNJ	Johnson & Johnson	Health Care	Pharmaceuticals	United States	2.95%	5.83%	0.6557	154.01	100.99	159.56	104.62	3.34%
BAC	Bank of America	Financials	Diversified Banks	United States	2.76%	12.03%	3.9191	25.77	101	33.39	130.86	4.18%
ARCC	Ares Capital	Financials	Asset Management and Custody Banks	United States	9.37%	4.65%	5.0812	19.88	101	20.49	104.11	3.32%
TCPC	BlackRock TCP Capital	Financials	Asset Management and Custody Banks	United States	11.40%	-1.73%	8.8111	11.46	101	11.88	104.68	3.34%
BTI	British American Tobacco	Consumer Staples	Tobacco	United Kingdom	9.76%	2.45%	3.094	32.11	101	29.44	91.09	2.91%
BHP	BHP Group	Materials	Diversified Metals and Mining	Australia	5.51%	10.07%	1.6124	62.64	101	61.7	99.49	3.18%
MSFT	Microsoft	Information Technology	Systems Software	United States	0.69%	10.16%	0.2693	374.95	101	404.87	109.03	3.48%
NKE	Nike	Consumer Discretionary	Footwear	United States	1.38%	11.13%	0.916	110.25	101	100.77	92.31	2.95%
XOM	Exxon Mobil	Energy	Integrated Oil and Gas	United States	3.60%	2.64%	0.975	103.58	101	102.13	99.58	3.18%
HDV	iShares Core High Dividend ETF	ETFs	ETFS	United States	3.74%	4.70%	3.8965	102.91	401	104	405.24	12.94%

Source: The Author, data from Seeking Alpha

Risk Analysis of The Current Composition of The Dividend Income Accelerator Portfolio

Risk Analysis: Analyzing the Companies' 60M Beta Factors

The graphic below illustrates the 60M Beta Factors of the 16 individual companies that are currently part of The Dividend Income Accelerator Portfolio. The chart highlights that some of the selected companies significantly contribute to reducing the portfolio's volatility.

Among the 16 holdings, British American Tobacco (with a 60M Beta Factor of 0.33), BHP Group (60M Beta Factor of 0.57), Johnson & Johnson (0.58), and AT&T (0.71) play a significant role in mitigating the portfolio's volatility.

The fact that eight out of the 16 individual companies exhibit 60M Beta Factors below 1 reinforces my confidence in the portfolio's reduced volatility and lowered overall risk level.

Risk Analysis: Analyzing the companies' Dividend Yield [TTM]

The graphic below showcases the Dividend Yield [TTM] of each of the 16 individual companies that are currently part of The Dividend Income Accelerator Portfolio.

It demonstrates that some of the companies significantly contribute to raising the Weighted Average Dividend Yield [TTM], which is important for the implementation of the portfolio's investment strategy to help investors generate a significant amount of extra income via dividends.

The companies that contribute most to raising the portfolio's Weighted Average Dividend Yield [TTM] are BlackRock TCP Capital (Dividend Yield [TTM] of 11.40%), British American Tobacco (9.76%), and Ares Capital (9.37%). All of these companies are strategically important components of The Dividend Income Accelerator Portfolio, ensuring that investors reach an attractive dividend income when implementing the intended investment approach.

Risk Analysis: Analyzing the companies' Payout Ratios

The graphic below illustrates that 14 out of the 16 selected individual companies that are presently part of The Dividend Income Accelerator Portfolio maintain a Payout Ratio below 80%. Among the 16 selected companies, nine have a Payout Ratio lower than 50%, indicating substantial potential for dividend growth.

Only Ares Capital (with Payout Ratio of 80.67%) and Philip Morris (84.60%) have a Payout Ratio exceeding 80%. I plan to underweight them within The Dividend Income Accelerator Portfolio, ensuring a reduced risk level for the portfolio.

Risk Analysis: Analyzing the companies' 5 Year Dividend Growth Rates

The graphic below illustrates that 14 out of the selected 16 individual companies have a positive 5-Year Dividend Growth Rate [CAGR]. Five of which exhibit a 5-Year Dividend Growth Rate [CAGR] that exceeds 10%.

Among the companies with the highest Dividend Growth Rates [CAGR] over the past 5 years are Mastercard (with a 5 Year Dividend Growth Rate [CAGR] of 17.92%), Bank of America (12.03%), Nike (11.13%), Microsoft (10.16%), and BHP Group (10.07%).

These companies highlight the portfolio's strong potential for delivering dividend growth, steadily increasing your annual dividend income.

Risk Analysis: The Dividend Income Accelerator Portfolio's Diversification Across Companies/ETFs

The graphic below illustrates that SCHD (with 32.9%) and HDV (12.9%) presently represent the largest proportion of The Dividend Income Accelerator Portfolio.

Bank of America (representing 4.18% of the overall portfolio), AT&T (3.73%), Apple (3.64%), Main Street Capital (3.62%), and Mastercard (3.55%) currently represent the largest individual positions of The Dividend Income Accelerator Portfolio.

It is worth noting that Bank of America is currently the only individual position that accounts for more than 4% of the overall investment portfolio, underscoring its reduced company-specific concentration risk and elevated chance of achieving positive investment results.

Risk Analysis: The Dividend Income Accelerator Portfolio's Diversification Across Companies When Allocating SCHD and HDV Across the Companies They Are Invested In

The graphic below shows the largest individual holdings of The Dividend Income Accelerator Portfolio when breaking down SCHD and HDV among the companies they are invested in.

Bank of America (with a proportion of 4.18%), Exxon Mobil (4.18%), and Johnson & Johnson (4.14%), represent the largest holdings of this portfolio. The fourth, fifth, and sixth largest individual holdings consist of AT&T (3.73%), Philip Morris (3.65%), and Apple (3.64%).

In the coming weeks, I plan to provide Apple with an elevated proportion when compared to the overall portfolio. This is due to the company's strong competitive advantages, wide economic moat and low risk level, providing investors with an elevated chance of successful investment outcomes.

Risk Analysis: The Dividend Income Accelerator Portfolio's Diversification Across Sectors

The graphic below shows the portfolio's diversification across sectors. It can be highlighted that the ETF Sector comprises the largest share (with 45.9%), followed by the Financials Sector (21.4%).

Risk Analysis: The Dividend Income Accelerator Portfolio's Diversification Across Sectors When Allocating SCHD to the Sectors It Is Invested In

When allocating SCHD and HDV across the respective sectors they are invested in, the reduced risk level of The Dividend Income Accelerator Portfolio is visible. This is highlighted through the fact that only the Financials Sector accounts for a larger proportion when compared to the overall portfolio (currently accounting for 27.89%).

All other sectors represent less than 13% of the overall portfolio: the Information Technology Sector currently accounts for 12.74%, followed by the Consumer Staples Sector (12.12%), and the Health Care Sector (11.81%).

Presently, the remaining sectors account for less than 10% of the overall portfolio: the Energy Sector represents 8.77%, the Consumer Discretionary Sector accounts for 6.17%, the Communication Services Sector for 6.15%, the Industrials Sector for 5.77%, the Materials Sector for 4.07%, the Real Estate Sector for 3.21%, and the Utilities Sector for 1.30%, reinforcing my belief that this portfolio has a reduced risk level.

Risk Analysis: The Dividend Income Accelerator Portfolio's Geographical Diversification

The chart below shows the portfolio's geographical diversification, illustrating that the majority of companies are from the United States, accounting for 90.5%.

The remaining 9.5% is provided by companies from outside the United States: 3.4% of the portfolio consists of Canadian companies (represented by Royal Bank of Canada), while 3.2% comes from firms out of Australia (represented by BHP Group), and 2.9% from the United Kingdom (represented by British American Tobacco).

The current composition of The Dividend Income Accelerator Portfolio aligns with its objective to invest in market leaders across different sectors and industries while achieving some degree of geographical diversification, ensuring a reduced risk level for the overall portfolio.

How To Build A Dividend Portfolio From Scratch That Yields More Than 4% (10)

Conclusion

By using The Dividend Income Accelerator Portfolio as a practical example, I have shown how you can build a dividend income portfolio from scratch with a reduced risk level that reaches a Weighted Average Dividend Yield of 4.31%.

The Dividend Income Accelerator Portfolio currently constitutes of 2 ETFs (the Schwab U.S. Dividend Equity ETF and the iShares Core High Dividend ETF), in addition to 16 individual companies.

The two selected ETFs are strategically important components of The Dividend Income Accelerator Portfolio, since they contribute significantly to blending dividend income with dividend growth.

While Schwab U.S. Dividend Equity ETF presently pays a Dividend Yield [TTM] of 3.45% and exhibits a 5-Year Dividend Growth Rate [CAGR] of 13.92%, iShares Core High Dividend ETF metrics are 3.74% and 4.70% respectively.

The Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio presently stands at an attractive level of 4.31%. At the same time, the portfolio shows strong potential for dividend growth within the coming years. This is underscored by the portfolio's 5-Year Weighted Average Dividend Growth Rate [CAGR] of 8.37%.

The current composition of The Dividend Income Accelerator Portfolio stands out due to its significantly reduced risk level. This is reflected in the broad diversification across sectors and industries, and the inclusion of companies that exhibit a 60M Beta Factor below 1 (eight out of the 16 individual holdings register 60M Beta Factors below 1).

Moreover, it is worth noting that many of the selected companies have attractive Payout Ratios (14 from the 16 individual companies exhibit Payout Ratios below 80%), and have shown significant dividend growth in recent years (14 have a positive 5-Year Dividend Growth Rate [CAGR]).

Five of the 16 companies have shown double-digit 5-Year Dividend Growth Rates [CAGR], further underlying their strong dividend growth potential.

Due to the portfolio's reduced risk level, and its attractive combination of dividend income and dividend growth, it offers investors high chances of successful investment outcomes, while there is not the necessity to worry too much about the ups and downs of the broader stock market. The sustainable dividends of the companies that are part of this portfolio can help you to steadily increase your wealth.

Author's Note: It would be great to hear your opinion on the current composition of The Dividend Income Accelerator Portfolio. Which other companies do you think would fit within its investment approach?

Frederik Mueller

I specialize in constructing investment portfolios aimed at generating additional income through dividends. My focus lies on identifying companies with significant competitive advantages and strong financials that can provide you with an attractive Dividend Yield and Dividend Growth, thus enabling you to augment your dividend income annually. By combining high Dividend Yield and Dividend Growth companies, you can gradually reduce your dependence on the broader stock market fluctuations.I also assist you in achieving a well-diversified portfolio across various sectors and industries. This diversification strategy aims to minimize portfolio volatility and mitigate risk. I also suggest incorporating companies with a low Beta Factor, which further contributes to reducing the overall risk level of your investment portfolio. My suggested investment portfolios commonly consist of a blend of ETFs and individual companies, emphasizing broad diversification and risk reduction.The selection process for high dividend yield and dividend growth companies within the investment portfolio is meticulously curated. I prioritize the pursuit of total return, encompassing both capital gains and dividends, rather than solely focusing on dividends in isolation. This approach ensures that your portfolio is designed to maximize returns while considering the full spectrum of potential income sources. By leveraging my expertise, you can benefit from a well-crafted investment portfolio that aims to generate extra income through dividends, while reducing risk through diversification, and prioritizing total return.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SCHD, PM, RY, O, AAPL, T, MA, MAIN, JNJ, BAC, ARCC, TCPC, BTI, BHP, MSFT, NKE, XOM, HDV either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.