One of the items to consider as you put together your dividend portfolio is yield target. You want the dividend stocks in your portfolio to meet your requirements for growth or for immediate income. This means that you will need to define your goals before building your portfolio.
What is a Good Yield Target?
As with so many things related to investing and to finances, what is good for you depends largely on your goals, as well as where you are at right now. One of the most important questions to answer about your portfolio is whether you plan to use it for income right now, or whether you are trying to grow it so that you can use it for income later.
If you plan to use your dividend portfolio for income later, you might be more interested in total returns than in yield. The yield is nice, since it will add to the number of shares that you own, but the total return might be a bigger focus. You can sell your investments later, after they have grown, and use the proceeds to invest in those stocks with higher yields for income. For many investors, a yield between 2% and 4.5% or 5% is acceptable for a dividend growth portfolio. There are a number dividend aristocrats that increase their pay outs regularly that can be ideal for this type of portfolio.
But what if you want income now? If you plan to use your portfolio for income right now, matters might change. You will need a higher yield in order to enjoy a higher income stream. This means your yield target should be between 4% and 6%. A lower yield won’t provide you with what you need. However, you don’t want a dividend yield that is too high. In some cases, a high yield can mean that there are problems, or it could be unsustainable. In either case, a yield that is too high is likely to be cut – and then you will see a reduction in income.
The key with an income dividend portfolio is to look for stocks that are likely to provide stable pay outs. There are dividend aristocrats that have pay outs in the 4% to 6% range, and that can satisfy those with a lower risk tolerance.
Before you decide on dividend stocks for your portfolio, consider your goals, and what investments are likely to help you reach them. It might be wise to consult with a financial planner who can help you sort through your options.