How to Design a Portfolio of Dividend Stocks
A portfolio is a combination of financial investment assets such as stocks and bonds. Portfolios are held directly by investors or managed by their financial consultants. Investors seek to construct portfolios that minimize risks and maximize returns. Dividend stocks are shares of companies that qualify for a portion of the companies' annual profits. Investors use the dividend yield ratio to determine their portfolio of dividend stocks. Dividend yield ratio is the percentage of returns that each stock is likely to earn. The dividend ratio is calculated by dividing the annual dividend payout by the total shares of a company's stock and multiplying by 100.
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Instructions
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1
Make a list of the companies you would like to include in your dividend portfolio according to their size. The size of a company is basically its market capitalization. Multiply the total outstanding shares by the current price of each stock to determine the market capitalization of each company. Outstanding shares are the total number of shares issued to investors and company insiders. This is shown under the capital stock section of the balance sheet.
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2
Gather past financial records and profit history of each of these companies to be able to establish their past profitability trends. You can find this information in the past annual financial statements posted on the websites of these companies. Subtract the dividends paid on preferred stock from the net income and divide the result by the total outstanding shares at the end of the accounting period to get the earnings per share (EPS).
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3
Identify the dividend declared per share under the stockholders' equity section of the balance sheet. You can find the detailed breakdown of the dividends declared per share in the "Dividends" subtitle under the "Stockholders' Equity" title in the "Notes" section of the financial statements. Multiply the total outstanding shares by the dividend declared per common share to determine the total amount of dividends.
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Divide the total amount of dividends by the total number of the outstanding shares of each of the companies. Multiply each of the results by 100 to get the dividend yield ratio of each company.
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Short-list the companies according to the percentage value of their dividend yield ratio, beginning with the company with the highest dividend ratio going downwards. The company with the highest dividend ratio will be the most profitable company.
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Select the companies that will comprise your portfolio of dividend stocks on the basis of your short-list, such that if you plan to invest in five companies, the first five companies will be your ultimate choice.
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Tips & Warnings
Emphasize past dividend payout ratios when gathering historical information about companies because this is the best indicator of future profitability trends of companies.
Do not invest in companies with a dividend yield ratio that is below 3 percent because you will experience difficulty in predicting their future performance.
