The question how to start a dividend portfolio was asked by Phillip, a teenager from Edinburgh. He has saved several thousand pounds in a building society savings account currently earning next to nothing. He is fed up with the low returns and is keen to benefit from lowly priced dividend paying companies, starting his own share portfolio.
So, how do you start building a dividend portfolio?
No matter how old you are or what your income currently is, anybody can build a dividend portfolio. Just invest in the ‘right’ companies at the ‘right’ time, and, over the years, the returns from your portfolio – dividends – will increase and increase and make a significant difference in your lifestyle.
Let’s get started . . .
Phillip, if you follow the following steps, you should be able to take that initial amount (you mentioned you have around £5000) and build yourself a solid dividend portfolio that can help supplement your employment income in years to come.
1- Open an online stock brokerage account
The first step is perhaps the more “complicated” one as you need a stock brokerage account before you can buy and sell shares. Being a teenager complicates that process a bit further, unfortunately.
However, there are a variety of ways to do this. Start by comparing which online stock brokers offer competitive terms. I suggest you stay away from stockbrokers who charge annual fees and/or ‘in-active’ fees.
What you are looking for is a broker that charges little for buying and selling shares (usually under £10 per trade is a good benchmark).
If you are below 18, ask your (grand-) parents to open an online stock brokerage account on your behalf. They will need to fill out a few forms, which you can download from the stockbroker’s website and then once it is all completed, you just transfer money into the account.
If you are between 16 and 18, you may want to wait until later this year when so-called stocks and shares ‘Junior’ ISA’s become available. Or, alternatively, once your brokerage account has opened, you can use the shares and cash therein and transfer this across to your Junior ISA.
Unfortunately the maximum deposit into a Junior ISA is just £3,000 in cash or shares. However, there are clear long-term benefits in holding dividend paying shares in a stocks and share ISA. So, worthwhile doing.
2 – Buy shares in two dividend paying shares
As you pay commission and taxes every time you buy shares, you do not want to buy too many different shares all at once. Consider buying shares every time you have at least £2000 in your account.
Obviously, with £5000, you can buy shares in two companies. The general rule is that you want to buy shares that:
- operate in different sectors, see our comments on diversification, and
- have consistently increased their dividends for years, but also, are likely to increase their current dividend pay outs, see our comments on the benefits of investing in companies increasing their dividends
3 – create an automatic savings and investment plan
While you will start earning dividends with the two dividend paying companies in order to build you dividend portfolio you will need to put more money in.
Once you start earning a wage, automate the process of transferring a fixed amount from your current account to your cash ISA savings account. Start with a small amount, that you know you don’t really need.
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.
Once you have £2000 or so in your cash ISA savings account, it is time to transfer it into your brokerage account and purchase shares in another dividend paying company.
4 – Compound your dividends
If you can, you should leave your dividends in your stock brokerage account in order for these to accumulate. Reinvesting your dividends is invaluable in the long term.
These dividends and the automatic contributions from your cash only ISA are what will make it possible for you to create a bigger and more diversified dividend portfolio.
Of course, the dividends will seem small, especially in the first years but compounding does work and therefore it is important to keep the money inside your stock and shares ISA account.
5- Have £2000, buy new dividend paying shares
When building your dividend portfolio what you want to do is to make a purchase every time you have £2000 available. Ideally you want to diversify into 20-30 dividend paying companies across different industries, etc.
Over time, make sure that no one company represents more than 5 per cent of your dividend portfolio in case any of them turns out to be a dud.
Consider subscribing to Dividend Income Investor.com in order to read up on when dividend paying shares are historically undervalued or overvalued.
And, finally . . .
6 – Increase the amount over time as your income increases
As your income increases, be sure to put a higher amount into your share portfolio. You will not even notice the difference but your dividend portfolio will grow much faster as will the returns.
Conclusion
No matter how old you are or what your income is, anybody can build a dividend portfolio. Of course, it’s easier said than done. Buying the right shares is important but getting started, and actually building the dividend portfolio is the real critical part.
Have you started building your own dividend portfolio? Why? Why not?
