7 Strategies to Build a High-Yield Stock Portfolio
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Do you want to retire soon or have some extra cash to cover everyday expenses? A high-yield stock portfolio gives you those options and has a lot of liquidity in case you need to offload some shares. Investments you make today can generate cash flow right away that compounds in the years ahead. A high-yield portfolio is riskier than keeping money in the bank, but most savings accounts have interest payments no one could hope to live on during retirement.
Investing is a common path to retirement and generating passive income. A strategic blue-chip dividend portfolio can act as an income stream while minimizing risks common in growth investing. Growth stocks could make a higher total return, but those assets typically have higher expectations and valuations. Past performance can make them tempting, but any cracks in the growth story can crush their skyscraper valuations.
A dividend portfolio has less volatility and can support you in retirement and help with current bills. These strategies can help you start your path to a diversified portfolio.
In this article
1. Start by analyzing dividend stocks
Investors must narrow their search to dividend stocks to turn their portfolios into income streams. Growth stocks without recurring cash flow won’t qualify for a high-dividend portfolio and only provide unrealized gains until you sell shares. Before you buy any stock, you should consider several metrics.
The P/E ratio is a popular metric for dividend-paying companies since many dividend stocks are mature. Most of these companies no longer post strong growth numbers but usually have desirable moats that make them feel like safer investments.
You can use many metrics to analyze a stock, but earnings and revenue growth are the most important ones. These numbers demonstrate how much a company has grown over several years and if growth is sustainable. Some growth stocks posted triple-digit revenue growth in 2021, only to fall into low single-digit revenue growth year-over-year in 2022. This deceleration and other factors contributed to many pandemic darlings crashing from their all-time highs. Many dividend stocks also took a hit, but since investors had lower expectations and many of these companies are mature, their declines are more moderate during a bear market.
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2. Look at a company’s dividend history
Growth investors don’t have to worry about this, but if you want dividends, you must look at each company’s dividend history. Sites like NASDAQ make this information easy to find. Investors should look for stable dividends that grow each year. It’s a standard practice for corporations to hike their dividend each year to reward shareholders and demonstrate their business model is strong.
Any company that hasn’t raised its dividend for years or had to cut it doesn’t inspire shareholder confidence, especially if companies in the same industry continue raising their dividends. A company’s dividend payout ratio also tips you off on its sustainability and its ability to hike future dividends. Stocks with payout ratios above 90% don’t have much room to raise yields, and weak balance sheets can force them to lower the payouts. This event would hurt the share price and give investors less cash to compensate.
High-yield portfolios don’t only reflect what you have now, but annual dividend growth can provide more cash flow than you may anticipate. If you have 100 shares of a company that pays $1 per quarter, you make $100 in quarterly dividends from that position. You can reinvest the dividend to make a little more next time, but what if the corporation decides to hike its dividend from $1/share to $1.10/share next year? That’s a 10% increase in pay. You would now make $110 each quarter instead of $100 for doing no additional work.
It’s normal to find companies that do those types of dividend hikes. Narrowing your search to companies with respectable yields and dividend growth can put you in a good position by the time you retire.
3. Know how much you need in your portfolio
Growing your portfolio is easy. You simply put more money into it. While this sounds incredibly simple, not everyone follows through with it. Working on your mindset can improve your portfolio, and it’s a good idea to know how much money you need to fund your lifestyle.
Start with determining how much you want to make each year in dividends. If you want to make $48,000/yr in dividends, that averages to $4,000/mo. Then, figure out how much you need in your portfolio by dividing your target yield. To average a 3% yield across your assets, you would need a $1.6 million portfolio. Targeting assets with 4% yields reduces this number to $1.2 million.
Either way, it’s a big number, which shocked me initially. However, dividend reinvestments, hikes, and consistent contributions make this number feel more doable, especially if you give yourself a longer time horizon. It’s stressful to think of going from $0 to $1.2 million annually. Accomplishing the same feat in 20-40 years makes the goal feel more doable. Your personal yield will also go up as companies raise their dividends. A stock can display a 3% yield if you search for it on google, but some people get a 5%-8% yield for the same stock because they bought shares at a lower price and let the dividends compound.
4. Set investment goals
It’s easier to set investment goals once you know how much your portfolio needs to hit the major milestone. Setting mini milestones along the way helps you stay focused in the short term and not get distracted by speculative assets.
Investors should look at how much money they invest monthly and strive to increase it. Some people are in a position to double their monthly contribution. Jumping from $100 to $200 monthly will accelerate your portfolio’s growth. This is the only part of your portfolio that you can control. You can’t control stock prices, dividend hikes, and steady payouts, but you can control your monthly contribution.
You can increase your portfolio contributions by lowering your expenses, increasing your income with a side hustle, and reinvesting every dividend. Increasing your contribution by any amount, even if it’s just 1%, puts you in a better position to grow your portfolio. As you invest more into your portfolio and look for creative ways to make more money and protect your earnings, you should challenge yourself with ambitious investment goals. It’s up to the investor to set challenging goals that don’t feel insurmountable.
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5. Sell cash-secured puts to enter positions
Options trading isn’t entirely boom or bust; selling cash-secured puts demonstrates a low-risk strategy to generate cash flow. The seller agrees to buy 100 shares of a company at an agreed-upon price, also known as the strike price. If a stock is $100/share and you sell a cash-secured put with a $90 strike price, you put down $9,000, which you must use to buy shares if the stock is $90 or lower on the expiration date.
In exchange for making this promise, you get a premium. This cash reward is the yield for your cash. If the stock doesn’t fall below $90, you don’t get shares, and the option expires worthless. You can proceed to sell another cash-secured put and collect more premiums. If the stock falls below $90, you must buy 100 shares at $90/share, regardless of how much the stock price falls.
This may sound risky, but if you use cash-secured puts for companies you wouldn’t mind owning for several years, you get shares of your favorite company at $90/share instead of $100/share, and you also get the premium. After receiving the shares, you will receive dividend payments.
You can sell covered calls once you have 100 shares. These work in reverse. You have to sell 100 shares at an agreed-upon price if the stock hits that level at expiration. Selling covered calls with strike prices far out of the money increase your upside and can provide steady premiums.
6. Don’t forget about fixed income
The stock market isn’t the only way to build a high-yield portfolio. Putting every penny into the stock market or any asset class doesn't make sense. Investors can diversify portfolios by spreading their money across REITs, consumer staples, tech stocks that pay dividends, and companies in other sectors. However, you can also generate cash flow from treasury bills, corporate bonds, and CDs. The yields on these assets are correlated to interest rates. As interest rates rise, you generate more cash flow with these assets. Conversely, future buyers get stuck with lower yields if interest rates fall.
A stock’s dividend yield also correlates with interest rates. As interest rates rise, stock prices fall, causing dividend yields to go up. That’s because investors want to park their money into less risky assets like bonds when their yields surpass the cash flow from most dividend stocks. When interest rates fall, stock prices rise and lower dividend yields.
Fixed-income assets are best for people with a low-risk tolerance and are popular among dividend investors. As a pro tip, you can save money for taxes and put those funds into a CD that matures right before your taxes are due. That way, you get to earn a return on your investment from funds destined for the government’s coffers before paying your taxes. You might as well earn some return before saying goodbye to that money.
7. Use index funds and exchange-traded funds (ETFs) to save time
Index funds, ETFs, and mutual funds expose investors to a bundle of assets. Most investors buy into these funds because they save time and generate respectable returns. Instead of researching dozens of stocks, you only have to research a few funds and their top holdings.
These funds do all the work for you and often mimic popular benchmarks such as the S&P 500 index. Most funds are not actively managed, meaning you won’t pay as much in fees. Vanguard and other firms provide funds with specific objectives for people who open a brokerage account with them. It’s advantageous to buy a Vanguard fund in a Vanguard brokerage account instead of with another firm. The same rule applies to other brokerage firms. If you have any questions, you can speak with a financial advisor who works at the firm.
Investors who buy funds don’t have to worry about selecting individual stocks. You can find funds investing in high-dividend stocks with a good track record of rewarding shareholders.
Related: Best ETFs of 2023 – Our Top Picks
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Start earning from your portfolio
It takes many years to retire with a high-dividend stock portfolio. Social security benefits and having a part-time job during retirement can make those years less financially stressful. However, you can start earning from a high-yield portfolio right away. Even if you invest a few dollars, you will start receiving dividends.
The dividends may start small, but if you stay focused on your goals and continue investing, the dividends will accumulate.
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Writer
Marc Guberti is a business freelance writer who specializes in personal finance, digital marketing, and entrepreneurship. His award-winning book "Content Marketing Secrets" teaches readers how to create, promote and optimize content for growth and revenue. Marc also hosts the "Breakthrough Success Podcast," where listeners learn how to master content marketing and get more clients.
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