How Do I Build an Income-Based Stock Portfolio?
Investors can buy dividend-paying stocks to reap income. Stocks and funds of stocks that pay dividends can be selected carefully for future income. There are criteria that are used to screen for stocks that are most likely to continue paying dividends in the future.
ETF or Direct Stock Investing
You can find passive exchange-traded fund (ETF) products that specialize in dividend paying stocks. Many exchange-traded funds charge less than 0.25 percent in fund expenses per year, have low turnover and have holdings that are diversified across 30 or more stocks. These products can be purchased for a small trading fee, usually around $10, from an online discount brokerage like E*Trade or Scottrade. If you are willing to make a time commitment of a few hours and have $120,000 or more to invest (about $4,000 for each of 30 stocks), investing directly in stocks can be cost competitive with low-fee ETF products. If each trade costs $10, that's an expense of 0.25 percent per position each time you buy and each time you sell. If you hold a stock for more 2 two years, your trading costs will be lower than those of an ETF that charges 0.25 percent in expenses. Determine how actively you want to invest. If you want to do research on your own you can pick about 30 individual stocks to create a diversified portfolio.
Screen for Dividends
Screen for stocks or exchange-traded funds that pay dividends. Not all stocks pay dividends, and those and stocks that do not pay dividends will not help you meet income goals.
Seek Sustainable Payouts and Room for Growth
As a rule of thumb, stocks that pay out less than 60 percent of their earnings as dividends are more likely to afford these payments year after year. They also have extra earnings to reinvest in the company for growth. Candidate stocks can also be filtered for positive free cash flow. Most online stock screening websites will let you screen based on these criteria.
Read News about Your Stock's Dividends
Monitor your portfolios for changes to dividend policies and payout ratios. Management will sometimes announce changes to dividend policies. Read news articles about stock picks to see if they intend to modify their dividend policies.
Joe Escalada is a financial analyst. He earned a Master of Business Administration from the University of California at Davis and has passed all three Chartered Financial Analyst examinations. He has a bachelor's degree from the California Institute of Technology.