How to start a dividend portfolio with $5,000

avatar By: IS
Date posted: 07.07.2010 (4:00 am) | Write a Comment  (31 Comments)

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Anytime we talk about stock picks or building a portfolio, one of the most asked questions on this blog is how to start building the portfolio itself. It’s easier said than done of course and lends easily to procrastination. Of course, this is what makes the biggest difference in the end. Making the right picks and trades is important but getting started, to actually build the portfolio is the real critical part. That being said, we decided to write a general guide. If you follow these steps, you should be able to take that initial amount ($5000 in this case) and multiply it many times over to build yourself a solid dividend portfolio that can help you achieve your ideal lifestyle through passive income. It’s not a piece of cake but it’s not rocket science either. It’s just discipline and hard work.

We used the example of starting with $5000 but this can be applied to any amount really. The only important part is actually getting started as soon as possible and to not delay,  not even for another week. You know as well as I do that a week can become a month can easily become a year, or even more. As Anthony Robbins said: “When is NOW the best time to start?”

#1- Open a brokerage account

The first step is perhaps the more “complicated” one as you must of course open a brokerage account. There are a variety of ways to do this but I would say that this is the #1 cause why most investors postpone opening an account. It doesn’t have to be. You can go to a broker such as Etrade and open an account. You do not need to do much. Basically fill out a few forms and then transfer money into the account. Depending on the broker, there can be a minimum amount to open the account. Once that is done, you will be able to transfer smaller amounts. If you do have $5000 free, you will generally be ok to open an account at most brokers. What you are looking for is a broker that charges little for stock execution trades (usually under 10$ is a good benchmark).


#2- Buy 2 reliable growth dividend stocks

Because commission end up being paid, you do not want to buy too many different stocks all at once. You want to avoid paying too much in commissions so a good rule of thumb is to buying a stock every time you have $2000 free in your account. Obviously, with $5000, you can buy 2. We will get more into choosing the right stocks later on in future columns but the general rule is that you want to take two stocks:

-In different sectors
-That have consistently increased their dividend payout for years
-Companies that can maintain the increases and current payouts
-Mature companies
-Etc

Every month at least, we give out some dividend picks in our free newsletter so you could get some ideas there.

#3- Set up an automatic investment plan (start small, then increase steadily)

This is really one of the main keys. While compounding will work and you will earn dividends with the 2 stocks you just purchased, the truth is that the goal is to build passive income and you will need to put a lot more money to work. The goal here is to do so on a very consistent basis. It is all about having it automated in my opinion. The easiest way is to have a savings account (for example at ING) and then do a weekly or bi-weekly transfer from your banking account to that savings account. Start with a small amount that you know you can make.

As time goes by, you can increase this amount. For example if you get a salary increase, you could put all or most of the increase into that automatic transfer in order . If you start at 10$/week and within 1 or 2 years you get an increase that gives you 20$ more per week, you could simply put half of that into your automatic money transfer. I’m telling you, it adds up a lot quicker than you realize. The key is to:

-Start as early as possible with the transfers
-Do it automatically so it’s not a “choice” between spending or saving
-Increase the amount over time as your income increases

Once you have $2000 or so in your savings account, it is time to transfer it into your brokerage account and add to your portfolio!

#4- Reinvest those dividends (they will grow)

Following the same logic, it is important to leave all dividends received inside the account. These and the automatic contributions are what will make it possible for you to create a bigger and more diversified portfolio. The dividends will seem small, especially in the early months when they might not be big enough to pay for a good dinner. But compounding does work and it is important to keep the money inside your account.

#5- Every time you get $2000, buy new shares

It is tempting to try to time the market but when it comes to a long term investment like this portfolio, you will end up losing more if you put too much effort into timing your trades.  What you want to do here is make a stock purchase every time you have $2000 available. Ideally you want to diversify into 20-30 companies across different industries, etc. We will discuss this aspect in greater detail in coming weeks but compared to a simple retirement portfolio, a dividend portfolio would have more positions because you are selecting individual companies. You do not want any one company to represent more than a small percentage of your portfolio in case it turns out to be the next Enron. There are enough good dividend portfolios to have 20 or 30 positions.

Do your research and see what investment is not only best oppotunity but also the best for your portfolio.

#6- Review portfolio at least quarterly

So you might be wondering if you should just keep buying all the time without ever selling. No, of course not. A good dividend stock might suffer a down turn, especially if the company is in decline. That is why at least quarterly you should look at every position to decide if the position should remain in your portfolio or if the conditions that warranted your purchase have changed significantly. The main things you would be looking at when doing this exercise are:

-Company revenue growth (if it’s negative… might be time to reconsider)
-Company profits (are they keeping up?)”
-Dividends payout (remember you are looking for stocks that are increasing their dividend or at least could do so in the near future)

#7- Increase the amount over time as your income increases

No explaining required. This is a key. As your income increases, be sure to put a higher amount into your portfolio, you will not even notice the difference but your portfolio will grow much faster.

Conclusion

In conclusion, no matter how old you are or what your income is, you can build such a portfolio if you apply the proper methodology and discipline. Over the years, it will increase and can make a significant difference in your lifestyle.

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31 Comments »

  1. Comment by Catarina — July 7, 2010 @ 6:45 am
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    wow I really like your schema!! It helps me to understand. Just feel I don’t have the time though…

  2. Comment by OneDay — July 7, 2010 @ 6:59 am
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    great post!!! I like when you are posting those diagram (fixed income portfolio and this one)!

  3. Comment by stephen — July 7, 2010 @ 10:26 am
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    Thanks for the post. Ever since I heard about passive income and dividend stocks I’ve been wanting to do that but didn’t know where to start. I like the idea of $2,000 at a time. I’m going to start with Abbot Laboratories and Coca Cola.

  4. Comment by IS — July 7, 2010 @ 10:29 am
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    @Catarina – Thanks! And the time required is really not that big. I will write more about this next week but if that is what’s stopping you, i’d go ahead!

    @OneDay – Thanks, got some valuable help with it:) Will thank my contributor:)

    @stephen – Great, happy to hear it! Are you on the mailing list? Abbot and Coca Cola were featured in this week’s edition:)

  5. Comment by Craig — July 7, 2010 @ 12:41 pm
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    Would you prefer yield over the sector?
    i.e. what about building a banking or resources dividend portfolio since those stocks are giving 3-4-5% instead of buying other stocks giving a 1.5%-2% dividend yield?

    So what is best; diversification or high dividend yield?

  6. Comment by John — July 7, 2010 @ 12:42 pm
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    Thanks, this post is very useful! My question would be regarding diversification. I find it very difficult to determine which stocks are a good diversification from my current portfolio and would love to hear your thoughts on that?

  7. Comment by The Financial Blogger — July 7, 2010 @ 1:53 pm
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    Nice job on the graph!
    Awesome strategy for small investors!

    I may consider this strategy for my Smith Manoeuvre (leveraging strategy). The dividend yield could easily pay the interest so it would become a “free” leveraging strategy ;-)

  8. Comment by IS — July 7, 2010 @ 5:24 pm
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    @Craig – Yes. In general, if there is more yield in one category, chances are that there is some risk associated with it. For a long term portfolio, I would want a diversified portfolio. You can find high yields in many different industries anyway.

    @John- I will try to write a post about that very soon:)

    @TheFinancialBlogger – Thanks!! And yes, it would probably be a very good strategy for the Smith Manoeuvre.

  9. Comment by stephen — July 8, 2010 @ 10:27 am
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    Yes, I’m on your mailing list and I was actually waiting for that email. With the market being so volatile lately, I have not been investing in stocks except my retirement accounts, but the passive income concept is very attractive to me and I want to start one. Thanks again for your email and very helpful post.

  10. Comment by IS — July 8, 2010 @ 7:56 pm
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    @stephen – Thanks for the feedback, I’m thrilled you like it!

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  12. Comment by Ned — July 10, 2010 @ 7:46 am
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    By trading in and out of high yielding dividend stocks you may be able to outperform the market. I find it is best to enter 45 – 60 days before the ex-dividend date as there is usually a share price run up to the ex-date and then a short term sell off after going ex-dividend.

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  16. Comment by IS — July 12, 2010 @ 10:24 am
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    @Ned – Is this run-off and sell-off because there is uncertainty about the dividend amount?

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  25. Comment by Kane — May 20, 2011 @ 1:47 am
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    Great article. Yes, investing dividend stocks is a great way to make money.

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  27. Comment by Forex Trading Deals — December 15, 2011 @ 7:35 am
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    Why should you wait till $2 000 to buy new shares? Especially with dividend reinvestment?

  28. Comment by IS — December 15, 2011 @ 7:29 pm
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    @Forex Trading Deals – Depends but initially you might want to accumulate different stocks rather than just buying more of the ones you own.

  29. Comment by Offices Woking — January 2, 2012 @ 1:39 pm
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    The best part about it is reinvesting and getting the compound interest. Brokers reinvest the dividends for you, or the company does it itself and it is much cheaper than buying shares normally, thanks for the article.

  30. Comment by Rakesh Jhunjhunwala — March 29, 2012 @ 2:37 am
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    Dividends are really the best way to protect oneself from significant capital loss as the stocks with good dividend yield fall less compared to others. Dogs of the Dow a popular stock picking strategy is based on picking highest yielding stocks in the index.

    Thanks for sharing such great strategy…

  31. Comment by Grama Keshavs Ananthram — August 21, 2012 @ 12:00 pm
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    Play Safe;Sail Safe !
    Spread your sparable Money in both Blue Chips and in Penny Stocks at 70%&30% ratios ! Many Many hits in Penny Stocks also Nosedives in Blue Chips !
    Grama Keshava Ananthram

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