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.
Do you want a dividend income stream that will increase every year? Here are some simple tips to check for the dividend stocks you’re interested in. The order to check matters because if the dividend stock doesn’t pass checkpoint one, it’s out.
Does the dividend stock have a track record of dividend payments?
Notably, this checkpoint allows dividend stocks that have a track record of maintaining or increasing their dividends to pass. Though we prefer stocks to increase their dividends every year, we understand that sometimes the macro environment forces stocks to freeze their dividends. It is a great feat to even maintain dividends during stressful times.
For example, to be prudent, the regulators forced the big Canadian banks to freeze their dividends around the time of the last financial crisis in 2009 and 2010. Once again, the regulators forced the banks to freeze their dividends. Even the best of the bunch, National Bank of Canada (TSX:NA) has maintained the same quarterly dividend for seven consecutive quarters so far, whereas prior to the pandemic, it increased dividends every two quarters.
Again, the dividend freeze is no fault of the big banks. National Bank has maintained or increased its dividend every year since at least 2002. Now, that’s a track record!
Depending on your comfortability, you might seek dividend stocks that have maintained or increased dividends for at least five, 10, 15, or 20 years.
If a dividend stock hasn’t made consistent dividend payments for at least five consecutive years, it’s out. The five-year test would include the stressful pandemic period that we’re experiencing, which is a decent test of resilience/defensiveness for a dividend stock.
As you may know, I’ve been investing in stocks for about 13 years. I surely love it when my stocks provide outperforming returns. Of course, there are laggards, too.
What more can stock investing be about if it’s not just about returns? Every stock investor wants to get rich, right?
I discuss below why earnings quality and dividend income could be important to you.
Since I delved into growth investing, including in small caps, I’ve become more deeply appreciative of stocks with underlying businesses that have superb earnings quality.
I hate to break the news. Stocks with high earnings quality won’t give you the greatest returns. However, they give you something else — a defensive, low-risk holding. These kinds of stocks should provide reassurance to any stock investor when the macro environment is in turmoil.
The more conservative you are as a stock investor, the bigger percentage of these types of stocks you should hold in your stock portfolio.