How To Build A $100,000 Dividend Portfolio With 2 ETFs And 5 Individual Picks

William_Potter

Investment Thesis

The selection of ETFs and individual companies and the strategic allocation of your dividend portfolio is what will most determine the long-term success of your investment portfolio.

To achieve successful investment results over the long term, several components are important when constructing dividend income-oriented investment portfolios.

First, when constructing a dividend portfolio from zero, it is important that each company does not exceed 5% of the overall portfolio, thus ensuring a reduced company-specific allocation risk. Such a strategy means that the performance of any single company will only have a limited impact on the portfolio’s Total Return. This is crucial as it will minimize the effect of a company’s poor performance on the overall portfolio during any given period.

Second, I believe it is important that the portfolio offers investors a reduced overall risk level, which leads to an enhanced probability of successful investment outcomes. This reduced risk level for example, can be reached through the inclusion of companies with low Beta Factors in addition to a broad diversification across companies and sectors.

Third, for long-term investment success I believe it is crucial that the portfolio successfully blends dividend income and dividend growth, allowing you to not only generate income for today, but also tomorrow.

Fourth, I believe it is crucial that the individually selected companies are attractive when it comes to risk and reward, thereby providing investors with a high likelihood of attractive investment results.

The dividend portfolio I am presenting in today’s article fulfills all of these criteria. No individual company accounts for more than 4.5% of the overall portfolio, indicating a reduced company-specific concentration risk. The reduced sector-specific concentration risk is evidenced by the fact that no sector accounts for more than 18% of the overall portfolio.

In addition, it can be highlighted that the portfolio successfully combines dividend income and dividend growth, evidenced by its Weighted Average Dividend Yield [TTM] of 3.59% and 5-Year Weighted Average Dividend Growth Rate [CAGR] of 7.58%.

I have selected the following individual companies for this dividend portfolio:

• Mastercard (NYSE:MA)
• Realty Income (NYSE:O)
• Ares Capital (NASDAQ:ARCC)
• VICI Properties (NYSE:VICI)
• Apple (NASDAQ:AAPL)

Mastercard has predominantly been selected for this dividend portfolio given its capacity to provide investors with dividend growth (the company’s 10-Year Dividend Growth Rate [CAGR] stands at 21.88%), its significant competitive advantages and growth prospects. I have just selected the company as one of my top two dividend growth companies to consider investing in during the month of June.

In particular, Realty Income has been selected due to its attractive risk-reward profile and ability to mix dividend income and dividend growth. The company’s Dividend Yield [TTM] stands at 5.94% and its 5-Year Dividend Growth Rate [CAGR] at 3.55%, effectively combining dividend income and dividend growth.

Ares Capital has predominantly been chosen for its capacity to produce income. The company’s Dividend Yield [TTM] stands at 8.96%. It is further worth noting that it has produced 19 Consecutive Years of Dividend Payments.

VICI Properties has been selected given its attractive Valuation, and mix of dividend income and dividend growth. The company exhibits a Dividend Yield [TTM] of 5.83% and a 5-Year Dividend Growth Rate [CAGR] of 7.76%. VICI Properties’ P/AFFO [FWD] Ratio stands at 12.76, 13.12% below the Sector Median. It is further worth highlighting that VICI Properties has just been selected as one of my two top high dividend yield companies to consider investing in during this month of June.

Apple, the U.S. Technology Giant, has been selected due to its enormous financial health, competitive advantages, positive growth outlook and attractive risk-reward profile. My confidence in Apple is reflected in the fact that the company from Cupertino continues to represent the largest proportion of my personal investment portfolio.

The following ETFs have been selected for this dividend portfolio:

• Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)
• iShares Core High Dividend ETF (NYSEARCA:HDV)

I have selected SCHD for its superior mix of dividend income and dividend growth, as well as its strong focus on companies that pay sustainable dividends.

HDV has been chosen thanks to its Dividend Yield [TTM] of 3.35%, its low Expenses Ratio of 0.08% (which is significantly below the Median of all ETFs of 0.48%), and its low Annualized Volatility of 10.40% (which is below the Median of all ETFs (12.72%)).

Overview of the 2 Selected ETFs and 5 Individual Picks

Click to enlarge

Source: The Author, data from Seeking Alpha

Risk Analysis of The Current Composition of This Dividend Portfolio

Risk Analysis of the Portfolio Allocation per Company/ETF

The two selected ETFs, SCHD and HDV account for the largest proportion of this dividend portfolio, each accounting for 40%, ensuring an extensive portfolio diversification across companies.

Each of the individually selected companies (Apple, Realty Income, VICI Properties, Ares Capital and Mastercard) account for 4% of the overall portfolio, ensuring a reduced company-specific concentration risk.

Source: The Author

Risk Analysis of the Company-Specific Concentration Risk When Allocating SCHD and HDV Across the Companies they Are Invested in

The graphic below illustrates the companies that represent the largest proportion of this dividend portfolio when allocating each of the ETFs (both SCHD and HDV) across the companies they are invested in.

Source: The Author, data from Morningstar

It is worth highlighting that Chevron constitutes the largest proportion, even though the company has not been selected directly for this dividend portfolio. Nevertheless, both SCHD and HDV are invested in Chevron. The company accounts for 4.27% of the overall portfolio.

In second, third, fourth, fifth and sixth place are VICI Properties, Realty Income, Mastercard, Ares Capital and Apple (with 4% each). Each of these companies have been selected individually to be part of this portfolio. It is further worth highlighting that they are not part of the two selected ETFs.

All remaining companies have not been individually selected, but at least one of the ETFs (SCHD or HDV) is invested in them. The seventh largest position of this portfolio is Verizon, with 3.84% of the portfolio, followed by AbbVie with 3.38%, Exxon Mobil with 3.32% and PepsiCo with 3.28%.

The portfolio’s reduced risk level and increased likelihood of positive investment outcomes are evidenced by no single company accounting for more than 4.5% of the overall portfolio. Additionally, each position representing at least 4% of the portfolio has a particularly attractive risk-reward profile.

Risk Analysis of the Portfolio’s Sector-Specific Concentration Risk When Distributing SCHD and HDV Across their Sectors

Representing 17.74% of the overall portfolio, the Financials Sector accounts for the largest proportion, followed by the Energy Sector with 15.31%, the Consumer Staples Sector with 13.65%, the Health Care Sector with 12.65%, and the Information Technology Sector with 11.28%.

The remaining sectors account for less than 10% of the overall portfolio: while the Real Estate Sector makes up 8.01%, the Industrials Sector represents 6.27%, the Communication Services Sector 5.04%, the Consumer Discretionary Sector 4.56%. the Utilities Sector 3.71%, and the Materials Sector 1.78%.

Source: The Author, data from Seeking Alpha and Morningstar

The fact that no sector accounts for more than 18% of the overall portfolio is an indicator of the portfolio’s extensive diversification across sectors, indicating a reduced sector specific allocation risk.

Risk Analysis: Analyzing the 5 Individual Positions of This Dividend Portfolio

Analysis of the Dividend Yield [TTM] and Dividend Growth Rate [CAGR] of the 5 Individual Positions

The chart below highlights that each of the individually selected companies in this dividend portfolio blend dividend income and dividend growth, thus indicating their suitability for dividend income-oriented investors.

Source: The Author, data from Seeking Alpha

With a 5-Year Dividend Growth Rate [CAGR] of 16.22%, Mastercard is the one that most contributes to the portfolio’s dividend growth potential.

With a Dividend Yield [TTM] of 8.96%, Ares Capital is the company that contributes most to the production of dividend income.

With a Dividend Yield [TTM] and 5-Year Dividend Growth Rate [CAGR] of 5.94% and 3.55% respectively, Realty Income effectively blends dividend income and dividend growth. The same is true for VICI Properties, which exhibits a Dividend Yield [TTM] of 5.83% while exhibiting a 5-Year Dividend Growth Rate [CAGR] of 7.76%.

At first glance, Apple may not seem particularly attractive for this portfolio with a Dividend Yield [TTM] of 0.52% and a 5-Year Dividend Growth Rate [CAGR] of 5.56%. However, I consider the company an excellent choice to optimize the portfolio’s risk-reward profile.

Analysis of the 24M and 60M Beta Factors of the 5 Individual Positions of This Dividend Portfolio

The analysis of the 24M and 60M Beta Factors of the selected companies provides additional proof of the portfolio’s lowered risk level. Three of the five individually selected companies showcase a 24M Beta Factor below 1: Realty Income exhibits a 24M Beta Factor of 0.67, Ares Capital’s stands at 0.69 and VICI Properties’ at 0.82. These numbers indicate that each pick contributes to reducing the volatility of this dividend portfolio.

Only two (Apple and Mastercard) have 24M Beta Factors above 1: Apple’s 24M Beta Factor stands at 1.15 and Mastercard’s at 1.04.

Source: The Author, data from Seeking Alpha

Analysis of the Payout Ratio and EPS Diluted Growth Rates of the 5 Individual Positions of This Dividend Portfolio

When analyzing the Payout Ratios and the EPS Diluted Growth Rates [FWD] of the 5 individually selected companies, it can be highlighted the portfolio’s reduced risk level in addition to its enormous potential for dividend growth.

With a Payout Ratio of 19.26% and an EPS Diluted Growth Rate [FWD] of 15.89%, Mastercard provides investors with strong potential for dividend growth.

The same is true for VICI Properties, which showcases a Payout Ratio of 66.22% and an EPS Diluted Growth Rate [FWD] of 29.76%.

It is further worth highlighting that I do not see Realty Income and Ares Capital’s elevated Payout Ratios of 73.56% and 80.00% as a problem for investors, given their positive EPS Diluted Growth Rate [FWD] of 6.17% and 22.73%, respectively. This suggests that the companies should be able to increase their profits in the coming years, indicating strong potential for dividend enhancements in the future.

Source: The Author, data from Seeking Alpha

The Additional Advantages of The Dividend Income Accelerator Portfolio in comparison to This Dividend Portfolio

The portfolio that I have presented in today’s article provides investors with a Weighted Average Dividend Yield [TTM] of 3.59% and with a Weighted Average Dividend Growth Rate [CAGR] of 7.58%. This indicates that it effectively blends dividend income with potential for dividend growth.

In comparison to the portfolio presented in today’s article, it can be highlighted that The Dividend Income Accelerator Portfolio showcases even superior metrics when it comes to dividend income and dividend growth.

Considering the portfolio’s current composition, The Dividend Income Accelerator Portfolio offers investors a Weighted Average Dividend Yield [FWD] of 4.63% in combination with a 5-Year Weighted Average Dividend Growth Rate [CAGR] of 8.07%, demonstrating superior results when it comes to dividend income and dividend growth.

Moreover, I am convinced that The Dividend Income Accelerator Portfolio provides investors with an even lower risk level compared to the portfolio presented in this article. This is due to its extensive diversification across sectors and industries, and its inclusion of financially healthy companies with strong competitive advantages and attractive risk-reward profiles.

Conclusion

The portfolio presented in today’s article not only provides investors with a reduced risk level through its inclusion of financially healthy companies with low Beta Factors, but it also effectively blends dividend income and potential for dividend growth. This is evidenced by the portfolio’s Weighted Average Dividend Yield [TTM] of 3.59% and its 5-Year Weighted Average Dividend Growth Rate [CAGR] of 7.58%.

I consider this portfolio to be a solid choice for dividend income investors that are aiming to invest with a reduced level of risk.

Nevertheless, I believe that the current composition of The Dividend Income Accelerator Portfolio not only offers investors a superior mix of dividend income and dividend growth (the portfolio has a Weighted Average Dividend Yield [FWD] of 4.63% and a 5-Year Weighted Average Dividend Growth Rate [CAGR] of 8.07%), but it also provides a superior risk-reward profile, offering investors an increased likelihood of attractive investment outcomes.

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