If you are playing catch up with your retirement savings or are still years away, this is the type of stock that you want to own in your portfolio. It’s unmatched track record of increasing dividends regardless of bear markets, international worries, or recessions and its ability to increase its cash flow year after year will help you build wealth.
When you start looking for stocks to generate income, it’s easy to focus on yields, and your temptation might be to believe that higher yields are always better. I too am a fan of high yields, but only when the dividends come from a sustainable business model and the market is mispricing the quality of the company which leads to the higher yield.
However, to build an income stock portfolio that is not subject to large swings in the stock market, you need to employ some portfolio management strategies beyond just investing in a handful of high-yield stocks.
When I speak with investors, either at investment conferences or through my newsletter or email, I focus on how we really can’t foresee when the market will correct or go into a bear market. These events are part of investing in stocks and happen on a regular basis, but the one thing I do know is that the market always recovers from a downturn. This is a key fact to remember when investing.
For income-focused investors specifically investing in stocks that will keep the dividends coming through all stock market conditions is utmost necessary. As you build an income stock portfolio, take the necessary steps to make sure you earn a stable and growing income stream through any market conditions.
Before I jump into a specific stock discussion to make the point and provide an attractive stock opportunity, here are a couple of basic portfolio strategies you should always have in mind as you research for stocks to add to your portfolio.
- Diversify across a number of stocks you own and by economic sectors. I recommend that about 20 stocks will give an adequate amount of diversification. This number needs to be spread across different market sectors such as equity REITs, financial companies (REIT or otherwise), energy, telecom, and transportation.
- Plan to reinvest a portion of your dividends, even if you are investing for income to pay your living expenses. The nice thing is you can still have a relatively high take-home yield even if you reinvest a portion of the dividends you earn. For example, Starwood Property Trust, Inc. (NYSE: STWD) currently yields about 11%. Taking 7% as income still leaves you 4% to reinvest. That reinvestment will buy more shares, giving you higher dividend payments the next time around and in the future.
- Look for dividend growth. Invest a portion of your portfolio – at least a quarter and up to half – in income stocks that are more focused on dividend growth than current yield. It’s like getting a raise every time the company increases dividends.
