3 simple steps to starting a dividend portfolio

The Motley Fool

If you were thinking of starting a dividend portfolio in 2017 and haven't got round to it yet, don't despair. There's still plenty of time. Setting up a dividend portfolio is a simple process, that can be done in just a few simple steps. Here's a brief three-point guide.

Step 1. Open a (tax-free) account

The first step in setting up a dividend portfolio is to open a brokerage account. A Stocks & Shares ISA is a good place to start, because any dividends received within this type of account will be tax-free. Over time, this can make a significant difference to your long-term returns.

Opening an account is an easy process that can usually be done online. However, it's worth taking a few minutes to compare the accounts offered by different brokers. Ideally you want a platform that offers low annual fees and low trading commissions.

Step 2. Choose which stocks to buy

Once your brokerage account is open and funded, it's time to choose some dividend stocks to buy. While dividend investing sounds simple, in reality it's more complicated than just choosing a handful of stocks for their high dividends.

Ideally, you want to own a selection of high-quality companies that can comfortably afford to pay dividends. You also want to look for companies that have grown their payouts in the past and will continue to grow them in the future. Sustainable, growing dividends are the keys to success as a dividend investor. If you're looking for stock ideas, there are plenty of articles right here on The Motley Fool that could help you.

You also want to diversify your funds over quite a few different companies. This reduces 'stock specific' risk - the risk that one poor performer will bring down your whole portfolio. If you don't have much capital in the beginning, that's ok. One solution is to buy a dividend-paying investment trust. Such a trust owns an entire portfolio of securities, giving you substantial diversification through just one security.

Step 3. Buy stocks and hold them for the long term

Once you have identified a selection of high-quality dividend stocks, the next step is to purchase them. This is an easy process that can be done in just minutes.

One thing that's worth noting, from past experience, is that it can pay to spread your purchases out over time. By spreading out your purchases over several months or even years, you reduce the risk of investing a lump sum at the top of the market, and seeing the value of your portfolio decline significantly if markets take a nosedive. If you have capital in reserve and markets fall, you'll be able to take advantage of the lower prices.

Once the stocks are purchased, the key is to hold them for the long term. Dividend investing is not a get-rich-quick strategy. It takes time to play out. However, if you reinvest your dividends year after year, over the long term your wealth is likely to increase substantially.

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