Step 1: Determine Your Goals

This is the first in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

Determine Your Goals

Investing is mainly about reaching your goals, so it’s important to make sure they are known at the outset. With both risks and rewards available, investors in dividend stocks need to make educated decisions regarding their finances. It’s important to ask yourself a few questions:

What kind of rate of return am I looking for?
It’s difficult to predict what kind of returns will be available over the next generation. In the past, an annual rate of return of 8%-10% before taxes was not out of the question. Although there’s some heavy pessimism these days, I believe this is still possible, and it may not be unrealistic to do a little bit better with a subset of your investments.

By getting a combination of 2-6% in dividends, 0-6% in share repurchases, and 3-15% in growth, depending on the particular strategy, double-digit returns are not impossible. For example, a company with a 4% dividend yield, 3% buybacks, and 5% growth may result in 12% long-term returns before tax. And these numbers can be improved by purchasing at a lower valuation and selling down the road at a higher valuation (for instance, in the case of portfolio re-balancing). But it’s important to be realistic and look towards long-term wealth building rather than quick and unsustainable profits.

Seeking a higher rate of return may involve more time spent on investing, and/or more risk.

What is my risk tolerance?
Each investor has a different risk profile. Some people take uncertainty better than others, and some even enjoy it. An individual’s total portfolio should be rather diversified in a variety of asset classes to reduce total risk, but depending on one’s preferences, a portfolio can be tweaked a bit to add or reduce risk and upside potential. Adding some extra cyclical companies, small caps, deep values, international exposure from certain areas, and contrarian choices may give you a chance for bigger returns, but may add risk to your portfolio.

How experienced am I?
Know Thyself. If you’re just starting out, take it easy, and stick to fairly straightforward, low-maintenance businesses. The amount of passive investments in your portfolio can be adjusted as you become more knowledgeable, and new asset classes can open up to you.

How long until I plan to retire?
Estimating the time you have left in your working life is an important part of your portfolio planning. It will impact a lot of other factors on this list like what kind of risk you’re going to take on and what your rate of return needs to be. It will give you an idea of the minimum amount you need to put aside each month to meet your needs and wants.

How much time do I want to devote to stock research?
Some people love investing. I include myself in this category. I enjoy reading annual reports, writing analysis articles, talking about investment opportunities with others, and so forth. It’s a hobby for me, as well as an important aspect of wealth-building. But for others, it’s just going to be about the results rather than the fun, and that’s ok. Some companies are more steady and sure than others, while others require more observation. Some strategies involve a more hands-on approach while others do best when one sticks to a hands-off approach. Aligning your interest with your portfolio will be important if you’re going to stick to your strategy.

Sample Goal: The Endless Portfolio

Here’s a good goal to have: Build an endless portfolio.

What I mean by an endless portfolio is a portfolio that provides you with more dividend income than you have in expenses, and does so while maintaining and growing your capital at a level that exceeds inflation. Instead of amassing wealth that you use in retirement as it dwindles with your age, this portfolio will not only maintain your lifestyle but will also continue to grow over time! With an endless portfolio, one can live for the rest of their life off of their growing income stream, and when they pass away, their wealth still exists which can be given to family and charities. This goal may sound intense, and it surely requires discipline and patience, but it’s realistic for many that start early.



  1. That “start off slow” point is a great one. For me, I started off with 70 percent of the portfolio in a huge diversified index fund and used the other 30 to make individual investments. As I got more comfortable and experienced, I eased off the index allocation and started picking more stocks. Great article Matt!

  2. The Endless Portfolio…I love it! If you ever write a book, that needs to be the title!

  3. Ah, an endless portfolio….like a perennial income garden :)


  1. […] a recap of my March 2011 posts: Step 1: Determine Your Goals 6 Long Term Dividend Stocks at Attractive Prices Step 2: Consider a Yield Target Becton Dickinson […]

  2. […] Ask yourself: -What kind of rate of return am I looking for? -What is my risk tolerance? -How experienced am I? -How long until I plan to retire? -How much time do I want to devote to stock research? Read the Full Article on Step 1 […]

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