In investing, knowledge is power. To paraphrase Ben Graham, you should strive to know what you're doing and for what purpose. If you don't understand the rules of the game, don't do it. If you're thinking of building an income portfolio, this article will guide you to success - securing your financial needs throughout your retirement. This is not a get-rich-quick scheme. The best investments come with patience and common sense.
Inflation and market risk are two of the main risks that need to be considered before investing. This question lies at the heart of the dilemma faced by income-oriented investors: how to find cash inflows, without excessive risk, offering sufficient profitability to guard against inflation.
You might decide to focus on fixed-income securities. Let's imagine a $1 million bond portfolio offering an annual income of $50,000 (which is impossible today with investment-grade debt). In 12 years' time, you would receive the equivalent of only $ 35'000 today, assuming an inflation rate of 3%.
Let's suppose that instead of investing in a bond portfolio, as in the previous example, you invest in stocks that pay solid dividends with a yield of 4%. These stocks increase their dividend payout by 5% per year, easily covering the rate of inflation, over the same 12 years. The $50,000 would rise to almost $ 90,000 a year. In today's dollars, this still represents a value of around $ 62'000, at the same inflation rate of 3%. There's no contesting the yield provided by the bond portfolio.
A portfolio that combines both methods can withstand both inflation and market fluctuations. Placing half your portfolio in equities and the other half in bonds is a proven method worth considering. With age, an investor's time horizon shortens and the need to beat inflation diminishes. In this case, a heavier bond weighting is acceptable. On the other hand, for a young investor, the risk of inflation must be taken into account.
Building a quality portfolio takes time. If it takes five years to find winners, that's not a problem. What could be better than having your retirement paid for by dividends from a quality company? Own 10, 20 or even 30 blue-chip companies with attractive yields! Before you even start buying, define your criteria. Do your homework on potential companies and then wait for the right price. If in doubt, wait a little longer. It's always better to abstain than to dive in without a second thought. Wait until you find good blue chips offering a decent and growing return. Not all risks can be avoided, but you can certainly avoid unnecessary ones if you choose your investments carefully.
Paradoxically, beware of high yields like the plague. They are often synonymous with the fragility of the company and therefore the instability of the income you're looking for. A current yield of 10% may sound appealing, but you could very quickly find yourself a bit of an asshole if the dividend were cut overnight.
Here are six steps to guide you through the creation of your portfolio:
- Spread the risk over 20 to 30 quality stocks. You're investing for your future income needs. If you focus on just a few positions, you risk becoming emotionally attached to them, which is not good. You need to spread the risk over enough lines to ensure your future income.
- Diversify your investments across five to seven industries. Owning 10 oil companies is all very well, until crude oil drops to $10 a barrel (well, at the same time, there's not much risk...). Dividend stability and growth is THE priority. So you'll want to avoid a dividend cut at all costs. If a major problem affects an entire sector at the same time, as was recently the case with finance, you'd better be well diversified, otherwise you risk a dividend cut on a considerable number of your holdings at the same time.
- Prefer financial stability to growth. Having both is great, but when in doubt, focus on financially sound companies.
- Look for companies with a modest payout ratio. A distribution ratio of 60% or less gives the company room to maneuver in the event of a hard blow.
- Choose companies with a long history of growing dividends. THE US Dividends 5+ or my portfolio are the benchmark of choice for building a growing dividend portfolio. Companies that have increased their dividends steadily over time tend to continue to do so in the future, assuming the company continues to be in good health.
- Reinvest dividends. If you start investing for income before you really need the money, reinvest the dividends you receive. This allows a portfolio to grow rapidly with a minimum of effort.
Discover more from dividendes
Subscribe to get the latest posts sent to your email.
Français 
English 
Italiano 
Deutsch 
Español 
Português
Excellent article!
Some time ago, I started a blog about the rich and their "techniques". In the course of my reading, I discovered Warren Buffet and Benjamin Graham, and then the dividend growth investing approach.
I liked the technique so much that I recently started building a portfolio of stocks in companies that pay growing dividends. I find the technique particularly captivating, simple and effective. What's more, by focusing on revenues and their growth, it distracts investors from stock price fluctuations, a major source of stress for many investors, and allows them to consider their shares for what they are: shares in a company with products, employees... And not just as lottery tickets!
I also exchange weekly with several American bloggers who use this technique successfully.
Few suggest investing a large proportion of capital in bonds. Instead, as Warren Buffett said recently, they suggest more defensive stocks such as utilities. These companies generally offer a higher initial dividend (4-6%) with more modest dividend growth (2-5%), allowing the "rich" individual to stay "rich".
Thank you Alain. I've been reading your blog and we seem to have a lot in common, in our philosophy of life, our sources of inspiration and our investment strategy. Welcome to the circle of bloggers seeking financial independence.