4 Simple Steps to Build a High-Quality Dividend Portfolio

Build a solid income portfolio today by buying companies that offer essential products and services like Fortis Inc. (TSX:FTS), Empire Company Limited (TSX:EMP.A), Royal Bank of Canada (TSX:RY)(NYSE:RY), and Telus Corporation (TSX:T)(NYSE:TU).

The Motley Fool

If your intention is to invest for the long term with minimal maintenance, then one simple way to do that is to build a portfolio with high-quality dividend companies. Then you could theoretically hold the portfolio forever while receiving dividend income that you can either reinvest into your portfolio or use it to pay your bills.

Here are four simple steps to build your very own dividend portfolio.

Step 1: Identify the sectors or industries that provide essential products or services

In these industries, people use their products or services no matter if the economy is doing well or badly. These include utilities, grocery stores, banks, and telecoms.

Step 2: Make a list of high-quality companies from those sectors or industries

For utilities, check out Canadian Utilities Limited (TSX:CU) and Fortis Inc. (TSX:FTS). Both have paid dividends for over 40 consecutive years. They generate steady cash flows from their operations and therefore pay safe dividends with 3% yields that grow at least 5% per year.

For grocery stores, check out Empire Company Limited (TSX:EMP.A) and Metro, Inc. (TSX:MRU). They both have paid increasing dividends for 20 years in a row. Compared to the utilities, they pay low yields of 1.3%, but have higher earnings-growth potential and thus have higher income-growth potential.

The biggest Canadian bank, Royal Bank of Canada (TSX:RY)(NYSE:RY), pays an above average safe yield of 4% with a sustainable payout ratio of 46%.

For telecoms, Telus Corporation (TSX:T)(NYSE:TU) has the highest customer retention rate compared with its peers. Further, Telus’s 3.8% yield is solid with a sustainable payout ratio of 66%.

Step 3: Periodically review the watch list to see what is priced fairly or at a discount

Periodically, every month or every quarter, review your list of companies to determine which of them are good buys. To eliminate the emotional element as much as possible, you should review your list periodically instead of when there is money is available for investing.

One way to help determine whether or not a company is overpriced is to look at its price-to-earnings (P/E) ratio compared with its historical ratios. For example, Royal Bank’s trailing 12-month P/E is 11.8, while it has typically ranged between 11 and 15 in the past. So, Royal Bank seems to be on the cheaper side today.

Historically, Royal Bank also hardly pays over a yield of 4.3%. So, it’s getting cheaper as it reaches that yield. Of course, it could very well go over 4.3%. During the financial crisis in 2008-09, it reached the yield of 7.1%! But that was a very rare occurrence.

Step 4: Buy whenever you have excess cash

Excess cash is cash you have left after building an emergency fund and is at least three to six months of your living expenses. The amount that you buy may be based on your transaction fees. For example, if you only want to pay a maximum of 1% for each buy, then you would buy a minimum of $1,000 of shares of a stock based on a $10 transaction fee.

In conclusion

As soon as you start buying quality dividend-paying companies at proper valuations, you start receiving a passive income. Theoretically, you can hold their shares forever as long as their business fundamentals remain intact. You can start with the companies above today.

If you’re holding in a TFSA, you won’t need to pay any taxes. If you’re holding in a non-registered or taxable account, eligible dividends are favourably taxed.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of CANADIAN UTILITIES LTD., CL.A, NV, Royal Bank of Canada (USA), and TELUS (USA).

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »