Building a Strong Dividend Portfolio

As you may know, the Federal Reserve has signaled that it intends to cut interest rates (77.5% odds of a 25 basis point cut in July) in order to keep the economy and markets moving forward and proactively avoid a recession.  If you are like me and have been enjoying the relatively high interest rates paid by banks and TreasuryDirect (TBills) as I have blogged about previously, that is all about to come to an end over the next year and depending on the pace of rate cuts, maybe sooner than we think.  Where interest rates end up at the conclusion of this cycle is anyone's guess, but we already have examples in Japan and Germany where the rates have actually gone negative and it costs you money to put it in the bank.  This should be concerning for any investor who is trying to build a safe, reliable stream of passive income. 

As a result I have been looking into building a theoretical portfolio of 20 solid dividend yielding stocks that can perform well in this low rate environment.  Using a dividend screener, I looked for well-established companies that have a 25-year or longer history of increasing dividends, the dividends are "qualified" meaning they are subject to the lower 0% - 20% maximum tax rate (depending on your income) and a yield of 3% or better.  The screen results are shown below along with the expected return on an equally weighted $100,000 investment in the portfolio.  As you can see, the average yield of this portfolio would be 3.94%, resulting in a $3,937 annual dividend or about $984 per quarter.  Since all these companies raise their dividend regularly, the expectation is that the dividend yield would continue to grow over time. 

I did take a look at Berkshire Hathaway's annual report disclosure of owned publicly traded companies for good dividend ideas, but all of the yields are very low except for Wells Fargo and JP Morgan Chase, which I added to the list because they are solid companies with good long term prospects and they meet the yield criteria.  Note that three of the four stocks I recommended for a passive income dividend stream in a prior post made it to this list (AT&T, ExxonMobil and Consolidated Edison).  The reason why Ventas (VTR) did not make this list is because the dividend is not "qualified."  Typically, REIT dividends are not considered qualified, although they can be quite attractive.  I like the diversified range of industries on this list as well (I didn't screen for any particular industry).  Additionally, many of these names are also recommended by dividend investor blogs that I follow. 

Having a balanced portfolio that includes a selection of excellent dividend yielding stocks for passive income is an important part of Building a Financial Fortress, regardless of the general investing environment, but especially as we head into a low interest rate environment.

I hope you find this post useful as you chart your investing course this year.

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