The Construction Of The Dividend Income Accelerator Portfolio

takasuu

Having published various portfolio allocation articles in the past few months for Seeking Alpha, I am now planning to build an investment portfolio from scratch.

In order to transparently document every investment decision and to analyze the portfolio's diversification over sectors and industries as well as its risk level, I have established a brokerage account which I will use exclusively for this dividend income portfolio.

This investment portfolio has a long-term approach and the investment decisions will be based on the fundamental data of the companies as well as their competitive advantages, financial health and current Valuation.

The Dividend Income Accelerator Portfolio aims to provide you with a mix between a relatively high dividend yield and dividend growth. This can help you to generate extra income in the form of dividends while increasing the amount from year to year.

At the same time, one of its objectives is to obtain an attractive Total Return. This is because a high dividend yield is not worth much if you don't obtain at least an attractive overall return for your investment. However, I would like to highlight that the main objective of this portfolio is not to outperform the market, but instead to represent a diversified investment portfolio with a reduced risk level, which provides you with stable and annually increasing income streams while aspiring to achieve an attractive Total Return when investing over the long term.

It is also worth mentioning that the objective of this investment portfolio is not to try to time the market. However, I will still show you that you can obtain attractive investment results over the long term when investing continuously in any market condition and with a long-investment horizon. I personally don't believe in market timing, but I do think that it's necessary to invest over the long term in order to achieve attractive results.

Another objective is to one day receive 100% of your initial investment back in the form of dividends due to the steadily increasing dividend payments of the companies we plan to invest in.

This kind of investment strategy, which focuses on a combination of dividend income and dividend growth, helps you to become increasingly independent from the stock market price fluctuations. When focusing on the dividend payments you receive from the companies you invest your money in, you are able to care less about the ups and downs of the broader stock market.

The Dividend Income Accelerator Portfolio is built for all investors that want to generate a significant amount of extra income via dividends and to raise this amount annually (this is possible through the selection of companies that pay a sustainable dividend while being able to raise it from year to year). At the same time, it's for investors who aim to achieve an attractive Total Return.

In addition, it has been designed for long-term investors that want to invest steadily for their retirement.

This portfolio is not for people who want to speculate over the short term. All of the selected picks will be investments based on the companies' fundamental data, their competitive advantages and financial health. When investing, you become a business owner of the companies you select and can therefore benefit from the profits they generate and the increasing dividend payments paid to you as a shareholder.

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

In general, each of the selected picks included in The Dividend Income Accelerator Portfolio should fulfil the following requirements:

I believe that it's particularly important for companies to possess strong competitive advantages. This is because companies with strong competitive advantages have the best chance of surviving over the long term.

When selecting companies with strong competitive advantages, you reduce the risk level of your investment portfolio and decrease the probability of losing your investment.

By investing in companies with a strong Profitability, you can again reduce the risk level of your portfolio, and therefore increase the probability of reaching an attractive Total Return when investing over the long term.

The investment portfolio will include the following categories of companies:

Incorporating high dividend yield companies will enable you to benefit from the dividend payments of the selected companies starting today. These type of companies will contribute to raise the Weighted Average Dividend Yield [TTM] of your investment portfolio.

High Dividend Yield companies usually have a strong competitive position and are able to generate a large amount of free cash flow in order to pay shareholders an attractive Dividend Yield.

Examples of companies that have a relatively high dividend yield are - among others - companies from the Multi-line Insurance Industry, the Tobacco Industry, the Integrated Telecommunication Services Industry, or the Integrated Oil and Gas Industry.

Dividend Growth companies allow you to increase the annual dividend payments that you receive at an attractive growth rate. Moreover, they help to increase the Weighted Average Dividend Growth Rate of your investment portfolio. This will help you to increase your additional income in the form of dividends year over year.

Examples of dividend growth companies can be - among others - firms from the Pharmaceuticals Industry, the Transaction & Payment Processing Services Industry, or the Systems Software Industry.

Another characteristic of these companies is that they tend to have a relatively low Payout Ratio, which means they have plenty of room for dividend enhancements in the future.

The largest part of The Dividend Income Accelerator Portfolio will consist of high dividend yield and dividend growth companies in order to reach an attractive mix between dividend income and dividend growth (and an attractive Weighted Average Dividend Yield and Weighted Average Dividend Growth Rate).

Growth companies that don't pay a dividend can also be part of this dividend income-oriented investment portfolio. However, they represent the lowest proportion of the overall investment portfolio when compared to high dividend yield companies and dividend growth companies.

The reason for this is that one of the main objectives of this investment portfolio is to reach an attractive mix between dividend income and dividend growth. If growth companies, that do not pay a dividend, had a high proportion of the overall investment portfolio, it would then reach a lower Weighted Average Dividend Yield.

However, I believe that some companies that do not pay a dividend, but are particularly attractive when it comes to risk and reward, can be appealing choices and therefore part of this portfolio in order to help us reach an attractive Total Return.

In a first acquisition step, I plan to acquire the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD).

I plan to select the Schwab U.S. Dividend Equity ETF as the first acquisition for the Dividend Income Accelerator Portfolio as it allows us to start with a broad diversification and a reduced risk level, while at the same time helping us reach an attractive mix between dividend income and dividend growth.

The Schwab U.S. Dividend Equity ETF currently has a Dividend Yield [TTM] of 3.56% and offers investors a Dividend Growth Rate [CAGR] of 11.32% from over the past 10 years.

In a second step, I plan to acquire the following two companies:

By adding BlackRock and Realty Income to The Dividend Income Accelerator Portfolio, we will select two companies that are able to provide us with a relatively high Dividend Yield, while at the same time offering Dividend Growth.

BlackRock's Dividend Yield [FWD] is 2.97% and its Dividend Growth Rate [CAGR] stands at 12.00%. Realty Income pays a Dividend Yield [FWD] of 5.44% and it has shown a Dividend Growth Rate [CAGR] of 4.41% over the past 10 years.

In the next analysis, I will explain in greater detail why I've decided to make the Schwab U.S. Dividend Equity ETF the first acquisition of the Dividend Income Accelerator Portfolio, and, in a second and third article, I will explain in greater detail the decision to select BlackRock and Realty Income.

In the following months, I will build the Dividend Income Accelerator Portfolio from scratch. The portfolio aims to provide you with an attractive mix between dividend income and dividend growth. Through this combination, you can increase your additional income via dividend payments from year to year.

The portfolio will also be built with the objective of providing you with a reduced risk level. This is due to its diversification over sectors and industries as well as the inclusion of companies that help to reduce portfolio volatility.

In addition to that, it can be highlighted that the companies selected for this portfolio have strong competitive advantages in addition to being financially healthy. Their economic moat helps to prevent other companies entering into their business segment, thus contributing to protect your invested money.

The Dividend Income Accelerator Portfolio is built with the objective of being suitable for any market condition while helping you sleep well at night due to the fact you can care less about stock market fluctuations.

It should also serve as a buy-and-hold-portfolio from which you can benefit enormously when having a long-investment horizon.

I will start building the Dividend Income Accelerator Portfolio at the beginning of September. I will invest $400 per month ($100 each week). Only in the first week, I'm planning a larger investment in the Schwab U.S. Dividend Equity ETF. This aims to ensure comprehensive diversification from the beginning and to prevent any initial over-concentration of individual companies within the overall portfolio. The Dividend Income Accelerator Portfolio will be an actual investment portfolio, involving real money.

In order to achieve similar results with your investment portfolio, you don't necessarily need to invest an equal amount of money. However, it's important to allocate similar proportions to each company.

During this phase of constructing the Dividend Income Accelerator Portfolio, my plan is to publish a weekly dividend strategy article about the portfolio. These articles will cover topics such as the portfolio's diversification across sectors and industries, its geographical distribution, and its projected dividends.

In summary, I would like to highlight that the Dividend Income Accelerator Portfolio will be built for anybody who would like to generate an extra income via dividend payments and to increase this amount steadily year over year while aiming to achieve an attractive Total Return with a reduced risk level when investing over the long term.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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