Step 2: Consider a Yield Target

This is the second in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

The average dividend yield of a portfolio says a lot about the portfolio itself. To calculate the portfolio dividend yield, simply add up the annual dividends from all holdings, and divide by the total stock portfolio value.

Depending on the type of portfolio you have, it may be useful to divide it into sections. For instance, a given portfolio might consist of cash, treasuries, bonds, non-dividend-paying stocks, and dividend stocks. In this case, to get a meaningful average yield, isolate the dividend stock component of the portfolio, and divide the dividend income from that component by the total worth of that component.

Average Yield = (Total Dividend Income) / (Total Dividend Stock Worth)

Dividend Growth Portfolio

An average yield between approximately 2.5% and 5% is suitable for those who aren’t planning on living off of their dividend income any time soon. Most importantly, the focus is on total returns, which implies a combination of the current dividend and growth of EPS and the dividend. Some companies with low yields will be the best investments for total return, while some companies that pay large dividends will also qualify as companies providing significant total returns.

Those with more time have more options. Slightly riskier investments, such as cyclical or deep value investments that provide more upside along with more risk may have a solid place in this sort of portfolio.

Current Income Dividend Portfolio

An average yield between approximately 4% and 6% is more suitable for those who are planning on living off of their dividend income now or in the near future. The yield target will depend to some extent on how much wealth you’ve amassed. If you don’t have quite enough, you’ll have to seek out the highest safe yields you can get, while if you have an abundance of wealth, you can focus on moderate yields with higher levels of safety and growth.

The three two things to look for are:
-A level of income that allows you to realistically meet your goals
-Income that grows at least with the level of inflation without touching your principle if possible
-Dividend Safety (don’t chase unsustainable high yields)

MLPs and REITs may be of use in a current income portfolio, along with utility companies, telecoms, and several of the dividend aristocrats and achievers.

Disclaimer: These are approximations for the purpose of providing examples. Consult a financial planner and/or make your own decisions regarding your specific portfolio arrangement. It’s important to combine a dividend portfolio with other asset classes for reasonable diversification.

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Comments

  1. So many firms that I have interviewed have told me that living off of dividends simply cannot and should not be done. We need a bit over 4% to pay our bills now. They all say we need dividend stocks and growth to insure that the money lasts. I don’t believe them.

  2. Think Dividends says:

    What’s your portfolio’s current yield?

  3. Doug,
    Whether one can live off dividends or not depends, of course, on the expenses of the person, their portfolio size, and their sustainable dividend yield. Focusing on dividends that grow gives investors the best of both worlds. Combining the portfolio with bonds and other asset classes is important too.

  4. Think Dividends,
    The average yield of my portfolio of dividend stocks is a bit over 3.6%. A few of my companies like CHD, TXN, CVS, and BDX drive the yield down a bit.

    My goal has been to boost my overall portfolio yield a bit this year. Capital appreciation from the oil segment hasn’t been helping.

    What about yours?

  5. Think Dividends says:

    I don’t pay attention to current yield, I keep track of my yield-on-cost which is 5.9%. I have a good mix of low-yielders (Visa) and high-yielders (REITs and pipelines bought in 2008-09).

  6. My unregistered portfolio of about 10 Canadian stocks yields around 4%. That includes TransAlta, which Think Dividends has nicely warned me about a few times :)

    I try not to chase yield. It’s not the only driver for me.

    Whether one can live off dividends really depends on your expenses; agreed. It’s income after all. If you spend more than you earn, well, you know the rest of the story.

    Great post Matt. I look forward to the rest of your series!

  7. Matt,

    I always love reading your posts; another good one. Thanks again for the advice on my own blog. I appreciate it and look forward to maintaining correspondence,

    DivPartisan

  8. Yield is nice, but I still think investors tend to accept far too much risk in REIT holdings than they’re compensated for in cash flow. There are a lot of high-flying, high-yielding REITs out there that are involved in the very dangerous game of buying long-term debt instruments (MBS) with short-term, low-interest credit. Obviously you can see how that will work out in the long haul when rates inevitably rise.

  9. Great article Matt! I agree that a 2.5%-5% initial yield is right in the wheelhouse for most dividend growth investors. Given even a modest dividend growth rate and you’ll have an excellent YOC after a decade.

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  5. [...] As a general rule, people that plan to currently live off of their dividend income will want to seek higher yields while investors that are primarily focused on earning a good rate of return for several years should focus on achieving a high sum of dividend yield and dividend growth. Read the Full Article on Step 2 [...]

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