With dividend tax hikes looming, special dividends being announced, and government security yields at all time lows, it's easy to forget the basics. Specifically, how can you create a portfolio of dividend paying stocks that separates Blue Chip yield from the value traps.
In this edition of Investing 101, Barbara Marcin, portfolio manager of the four-star rated Gabelli Dividend Growth Fund (GABBX) walks us through the basics of building a portfolio of stocks that spins off some income to patient investors.
Tip #1: Be Patient and "Layer" into Positions
Dividend stocks aren't about catching every rally. The idea is to take the long-view and create a portfolio built to last. Marcin suggests investors with a 3-year horizon slowly build positions rather than dive in all at once. "Put in a third now, a third in three months, and a third after that," she suggests in the attached video.
In a volatile environment, having a set schedule like this keeps investors from getting unnerved and making impulsive decisions.
Tip #2: Look at the Company Then the Dividend
Marcin says investors should buy stocks of companies they believe in first and foremost, with the yield coming second. Paradoxically, stocks with high yields can be the least safe on the market. When you see a name kicking off 5 or 6% while the rest of the blue chips are yielding half that, it's a sign that institutional investors are skeptical of both the company and its ability to pay the listed dividend.
If 2 or 3% seems low to you, Marcin begs to differ. Dividends are "the highest current return available compared to anything 'safe'... Treasuires, CDs, anything."
Tip #3: Take a Balanced Approach
Marcin takes a straight forward approach to accumulating positions in dividend stocks. Stick with quality names and relative safety. "I would feel most comfortable with a whole portfolio of dividend paying stocks paying between 3 and 4%."
Not too hot or too cold, but just right for investors looking for relative safety with a little income thrown into the mix.