Wealth Systems: Dividend A Day, Part I
Building the Ultimate Income Portfolio
This is the first Wealth Engine we’re unveiling over the course of a special series. You are going to get your very own Wealth System up and running.
A Wealth System is comprised of multiple Wealth Engines with the potential to generate current income and provide asset accumulation.
We have several passive income yielding options available:
Dividend Paying Stocks
Launching a SaaS Offering
Publishing Information Products
…and now we present Part I of our Dividend A Day series.
I remember being shocked shortly after getting my first job and realizing “the bills arrive every day, but my paycheck only hits twice a month”.
It occurred to me I needed to budget and save.
It also occurred to me that I needed to turn on other income sources.
I thought: getting paid every day sounds pretty nice.
So in this seven-part series, I'm going to walk through how to build a portfolio that aims to deliver an average of one dividend payout, each day.
Now I know what you're thinking - is that even possible?
Tracking 30 different dividend payment schedules seems crazy. But stick with me and you'll see it's very doable with the right mix of securities. By the end of this series, we'll have a portfolio tailored to deliver steady income that can cover daily expenses.
Here's what we'll cover:
The basics of dividend investing + the key benefits of generating our own "paycheck"
Understanding dividend yields, ex-dividend dates, and payment schedules
Managing the portfolio over time - reinvesting versus spending dividends
Tax considerations and how to maximize income in taxable accounts
How to evaluate dividend payers for safety and sustainability
Adjusting the portfolio as life circumstances change
Whether you're close to retirement or just love getting paid, you'll learn how to create your own personalized "dividend a day" portfolio.
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Now let's dive into the nitty gritty of dividend investing!
The Power and Flexibility of Dividend Income
Dividend investing provides a powerful way to generate cash flow.
By owning stocks and funds that pay out steady dividends, you can create an income stream that suits your needs. This gives you options - reinvest to grow your portfolio, or spend the dividends for income.
The key benefit of dividend income is it's very flexible. You get to decide when and how much to spend. With draws from your portfolio, you deplete your principal. But with dividends, you earn income while keeping your underlying assets intact.
This keeps your portfolio growing while the cash is flowing.
Another major perk is that dividend income is often more stable than share prices. Companies tend to maintain (or grow) their dividends through ups and downs in the market. This provides a cushion for your total returns during periods of volatility.
And unlike bond yields, dividend income has the potential to rise over time. Companies increase dividends as earnings grow, offering you an inflation hedge. So dividend investing provides growing income that you have significant control over.
With that foundation laid, let's explore how to earn dividends on a daily basis.
Dividend Yields and Payment Schedules
Before we start constructing our portfolio, we need to understand how dividend income works. Dividend yield and payment schedules are key to maximizing our frequency of payouts.
Calculating Dividend Yields
Dividend yield measures the annual dividend payment relative to the stock price.
For example: if a company pays a $1 annual dividend and trades at $40 per share, its yield is:
$1 Dividend / $40 Share Price = 2.5% Dividend Yield
Higher yields indicate larger dividend payments relative to the stock price. Yields can rise if dividends increase or if share prices fall.
When building our portfolio, we want to target stocks with higher yields to maximize our daily income potential.
But yield alone doesn't tell the full story...
The Importance of Payment Schedules
Yield calculations use the annual dividend amount.
But companies don't (often) pay out dividends just once per year.
Payment schedules vary, with quarterly dividends being most common.
In the introduction, I outlined that we'll be constructing a portfolio with the goal of generating an average of 30 dividend payouts per month. This may sound difficult, but it's very feasible with the right mix of securities.
The key is combining three types of dividend payers:
Monthly paying stocks and funds
Monthly payers provide the baseline - 12 payments per year. Quarterlies add another 4 periodic dividends. And weekly payers fill in the gaps with 50+ smaller distributions.
When combined properly, this blend results in a high-frequency dividend income engine that averages out to about one distribution per day.
Constructing this portfolio takes work - but the rewards of creating your own steady "paycheck" makes it worthwhile. It takes dedication to track the various payment schedules and dates.
Some dividends will be small, others large.
But they add up to a growing cash flow stream you can rely on.
Building this portfolio aligns with my personal investing philosophy:
I believe the best way to grow wealth is owning great companies for the long-term. And dividends are the clearest indicator of company quality. Financially healthy firms share their success with shareholders through dividends.
The "dividend a day" portfolio allows me to turn market-beating companies into an income stream tailored to my lifestyle. The combination of dividend growth and frequent payouts helps me achieve financial independence.
With the right construction, you can create significant cash flow on top of portfolio growth.
So if having your money work for you appeals to you too, stick with me through this series. By the end, you'll have the tools and knowledge to create your own customized income portfolio.
Tracking Schedules for Frequent Dividends
To earn dividends on the daily, we need to track a lot of dates.
Ex-dividend and payment dates are key. The ex-date is when the stock trades without its dividend. To earn a dividend, you must own the stock before that date.
The payment date is when income hits your account.
So in targeting frequent dividends, we need to consider payment schedules as much as yields.
I flow everything through a Google Calendar, and I keep about 450 securities in a CRM with payment dates, yield history… everything.
It's essential to know when dividends detach from stocks (ex-dates) so we don't miss out.
Thankfully, there are tools to make this easier.
Most brokerage platforms like allow you to view dividend dates and schedule payouts for holdings.
Other resources provide dividend calendars across different stocks and funds. I recommend keeping an overall calendar to visualize the portfolio's payment schedule. It takes some maintenance, but doing so helps ensure consistent dividend income.
It is also immensely motivating to see that calendar fill up with entries.
The goal is building a portfolio with payment schedules evenly spread out. Having different stocks paying every week and month results in daily income on average.
With the foundations covered, let's move on to picking securities.
Evaluating Dividend Stocks and Funds
When screening potential dividend payers, we want to assess both yield and dividend sustainability.
Our goal is to select stocks likely to maintain (or grow) their dividends over time.
Here are some tips on analyzing dividend stocks:
Payout Ratio - The percentage of earnings paid out as dividends. Lower ratios around 50% suggest room for growth. High payout ratios above 80% raise sustainability concerns.
Cash Flow Coverage - Companies with cash flow comfortably covering the dividend are safer bets. Look for dividend coverage ratios above 1.5 — many folks won’t consider any stock with a DCR under 2.
Earnings Growth - Expanding earnings allows companies to grow dividends over time. Seek stocks with long-term earnings growth forecasts above 12% to 15%.
Reinvestment Rate - The rate of company reinvestment into the business. Ensure enough reinvestment alongside dividends.
Credit Rating - High quality companies tend to maintain dividends. Target companies with an S&P credit rating of A- or higher.
No single metric tells the full story. But analyzing factors like these helps identify stocks likely to deliver sustainable income.
Diversified funds are another option. Equity income funds hold dividend stocks across many sectors and companies.
…funds also come with expenses, so I typically study what the fund is selecting and make my purchases directly.
If you don’t have that kind of time or aversion to fees — funds work great.
When evaluating funds, check the dividend yield and historical consistency of payments. Funds with 10+ year histories of steady or rising dividends carry less income risk.
That’s because the typically choose the highest quality Dividend payers.
When seeking safe dividend stocks, the Dividend Aristocrats are a great hunting ground.
These are S&P 500 companies with 25+ consecutive years of dividend increases.
The dividend aristocrats represent the "best of the best" dividend growers. Names include Johnson & Johnson (JNJ), Coca Cola (KO), Procter & Gamble (PG), and more.
Long histories of maintaining and raising dividends through all market environments points to safety and consistency. This makes aristocrats a nice blend of income growth and dependability.
Just be aware that aristocrat status doesn't automatically equal a good investment. Make sure to assess the business fundamentals and valuation. Income safety matters, but so does earning satisfactory total returns.
High Earnings Coverage
One metric I analyze closely is the dividend payout ratio based on company earnings. I prefer fairly low ratios, around 40-60% of earnings paid as dividends.
Why not simply seek stocks with the lowest ratios for maximum safety? Two reasons - higher cash returns and growth.
Higher payout ratios funnel more profits back to shareholders. And the best businesses grow earnings rapidly, reducing the ratio over time through rising profits.
That means healthy, growing firms can sustain moderately higher payout ratios.
Just avoid excessive ratios above 80%, as those indicate dividends consuming too much of earnings. The 40-60% range offers a sweet spot - safety and solid income.
Ideal dividend metrics differ across sectors. For example, 80% payout ratios raise concerns for manufacturers but are common among REITs because REITs must pass through that much (or more) of their income to keep tax free status (for themselves).
This occurs because capital intensive businesses need to reinvest heavily, allowing for lower dividend ratios. But REITs simply collect rent from properties, requiring nearly all profits go to shareholders.
So it's important to factor in sector trends and ranges when analyzing payout ratios. The same absolute ratio means different things for different kinds of companies.
Always dig into the reasons behind the numbers based on the business model and industry. This avoids false alarms from lack of sector context.
One major benefit mentioned was dividend growth over time. Steadily rising dividends help maintain purchasing power against inflation. Just how powerful is dividend growth?
Over the past 50 years, dividends on the S&P 500 have grown at approximately 6% per year on average.
That handily beats inflation.
So dividend payers don't just provide income - they provide income that rises over time. This happens because companies increase dividends in line with earnings growth. Profitable firms share more with shareholders when their bottom lines expand.
This organic growth is very powerful.
For example, a stock yielding 3% today with 6% annual dividend growth will provide over a 5% yield on your starting investment in just 5 years. That allows your income stream to grow along with expenses.
Dividend Tax Treatment
Another important aspect is the tax advantage dividends offer in taxable accounts. Qualified dividends are taxed at the favorable long-term capital gains rates - generally 15% federal but as low as 0% in certain brackets.
This contrasts with bond income, which gets taxed at your ordinary income rate, up to 37% federally. That's a significant difference which boosts returns.
So dividends not only provide growing income - they also offer tax efficiency to enhance your total after-tax earnings.
Quarterly Earnings Calls
When researching dividend stocks, I always listen to earnings call transcripts for that last quarter.
Pay attention to what executives say about the dividend. Their commentary will indicate if they remain committed to growing the dividend over time.
If they start suggesting the dividend is at risk, it's time to avoid or sell that stock to protect your income stream. Ongoing earnings call monitoring helps avoid unwanted dividend cuts.
One important test of dividend safety is how the company fared in previous recessions. Look back 10+ years at their dividend actions. Stable or rising dividends during challenging times increase the likelihood of maintaining payouts in future downturns.
Warren Buffett says the true test of a defensive business is a good record through at least two market cycles. I apply the same logic when evaluating dividend stocks. Proven resilience enhances income sustainability.
When focusing on income, stocks and funds with higher starting yields are appealing. But be careful - high yields can also signal trouble if they aren't supported by fundamentals.
Most stable companies pay dividends yielding 3-5%. Yields approaching 10% should trigger scrutiny. Check earnings, cash flow, and debt levels. Ensure the high yield is sustainable, not a warning sign.
There are some exceptions - REITs and MLPs routinely yield 7-10% since they must pay out significant income. But even then, make sure historical payouts have been consistent and growing over time.
Now let's shift gears to portfolio construction before wrapping up for today.
Putting the Portfolio Together
Armed with knowledge on dividend investing, we're ready to combine securities into a portfolio.
Here are the guiding principles for portfolio construction:
Diversification - Include stocks across multiple sectors to reduce risk.
Balance - Mix individual stocks with diversified dividend funds.
Payment Schedule - Target monthlies, quarterlies, and weeklies to spread out payment dates.
Yield - Seek relatively higher yielding stocks and funds to increase income.
Growth - Select companies with earnings growth to support future dividend increases.
Quality - Stick to companies with strong financial health and competitive advantages.
The goal is spreading out payment dates while maximizing yield. If we pick the right mix of monthlies, quarterlies, and weeklies, our portfolio can generate dividends on a daily basis.
Closing Thoughts and Next Steps
Phew, we covered a lot of ground on the basics of dividend investing!
You now understand key benefits like flexibility and growth. We also dove into dividend yields, payment schedules, and how to evaluate stocks.
With the foundation set, we'll start constructing our daily dividend portfolio in Part 2. We'll run through examples of stocks and funds to buy across different sectors. By the end, you'll have a blueprint for a diversified, high-yield portfolio throwing off income every day.
And we'll also discuss portfolio maintenance - how to track payments and adjust over time. The journey to daily dividends is just getting started - I can't wait to share this knowledge to help you achieve your own income investing goals.
This Dividend Engine is going to be a major component of your Wealth System.
Wait til we finish building it, and you see your paychecks start coming in!
Wealth Systems is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
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