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2 Must-Have Traits of a Retirement Dividend Portfolio

Are you building a dividend portfolio for your retirement? If so, you should work towards two goals.

The portfolio should generate the required income that maintains your purchasing power over time, and you should be able to sleep well at night knowing what you hold in your portfolio.

Here I’ll discuss each point.

Does your portfolio generate the required income?

Your dividend portfolio is probably not your only source of income. For example, you may get income from pensions or rent during your retirement. After subtracting other sources income, you should come up with an income amount that your dividend portfolio should generate.

Let’s say you need your portfolio to generate $30,000 of annual income. Where can you invest for safe income that can at least maintain your purchasing power? To maintain your purchasing power, the dividend growth of your portfolio should keep pace with the long-term inflation rate of 3-4%.

If you have $600,000 saved up, you need a portfolio yield of 5% to earn $30,000 a year. Hopefully, you started building your portfolio years ahead of retirement, so you can pick up quality dividend companies at the right valuations.

BCE Inc. (TSX:BCE)(NYSE:BCE) offers a yield of 5% at its recent quotation of $57 and change. It’s also not particularly expensive, trading at a price-to-earnings ratio (P/E) of about 16.6. The analyst consensus across 22 analysts expects BCE’s earnings per share (EPS) to grow 3.5-4.7% on average per year for the next three to five years. So, investors can expect its dividend to grow in that range as well.

For faster growth, investors should consider Telus Corporation (TSX:T)(NYSE:TU). Although the telecom yields 4.5%, which is lower than BCE’s yield, 24 analysts expect Telus to grow its EPS by 6.5-7.1% on average per year for the next three to five years. Trading at $42 and change, Telus is reasonably valued at a P/E of 16.4.

Telus’s lower yield can be compensated by diversifying into Altagas Ltd. (TSX:ALA), an energy infrastructure company with power, midstream, and utility assets.

Altagas yields 6.8%. If investors have room in their tax-free savings accounts, they can consider buying Altagas’s subscription receipts, as they trade at a discount to Altagas’s common shares and offer a higher yield of about 7%.

If you think Altagas’s high dividend implies that it’s a slow-growth dividend, then you’ll be happy to hear this: if the company successfully acquires WGL Holdings, it intends to increase its dividend by at least 8% per year through 2021.

retired life

Does your portfolio allow you to sleep well at night?

Portfolios are very personal. One that makes your neighbour sleep well at night may not help you sleep well at night.

Diversification in quality companies can help you sleep in peace. Some investors maintain a maximum 5% allocation to any stock and 20% allocation to any sector; any problems with one stock or sector won’t wipe out their portfolio and can also allow them to hold through temporary downturns.

Buying at the right valuations also helps. By knowing that you bought your dividend stocks at attractive valuations, you can let the businesses and growing dividends do their thing.

The combination of quality businesses with growing dividends will lead to higher share prices over time. Most importantly, your portfolio income will also increase, so you can maintain your desired lifestyle.

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Fool contributor Kay Ng owns shares of ALTAGAS LTD and the subscription receipts of Altagas. Altagas is a recommendation of Stock Advisor Canada.

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