I’m aiming to build a UK dividend share portfolio capable of delivering £500 a month in passive income. And my calculations suggest the capital value needs to be around £150,000 if I can achieve an overall portfolio yield of about 4%.
And 4% seems realistic to me. After all, the businesses behind the shares I’ll pick will likely have the potential to raise shareholder dividends a little each year — that’s why I’d choose them in the first place. So even if the yield is lower than 4% when I first buy those shares, over time, the shareholder payments could grow.
Compounding gains to build up a portfolio
My plan is to plough dividend income back into my share investments to help compound the value of my portfolio over time. I think it’s possible to build up to a value of £150,000 if I compound my gains alongside regular monthly contributions of new money into my share account.
But, of course, nothing’s certain. Dividend yields can rise and fall. And they can even stop altogether if company directors believe such action is necessary. For example, if the underlying business begins to struggle, the shareholder dividend could become an early casualty.
And that’s where great investors such as Warren Buffett come in. I’d aim to learn from his methods when choosing shares. For example, he’s known for his focus on the quality of an underlying enterprise. And to him, that means looking for businesses with an enduring competitive advantage. He often talks about economic moats, meaning businesses with a strong position in their trading markets that other companies find hard to breach.
Sometimes an economic moat can be found because of strong brands. Other times it could be because of networks or other factors. So one of the first steps I’d take when selecting shares is to ignore businesses without strong competitive advantages. And I’d do that even if they have a big dividend yield.
Not all UK dividend shares will make the cut
For example, many companies operating in cyclical sectors provide what I’d describe as commodity-style products and services. In other words, there’s often little to differentiate one company’s offering from another. I’m thinking of banks such as Lloyds and Barclays, house builders such as Persimmon and Taylor Wimpey, airlines like easyJet and International Consolidated Airlines and firms in other cyclical sectors. Such companies often pay big dividends, but the cyclical nature of their operations means they sometimes don’t as well.
So cyclical outfits won’t make it into my dividend-focused share portfolio. Instead, I’d focus on companies trading in sectors such as utilities, pharmaceuticals, fast-moving branded consumer goods, information technology and others.
For example, right now, I’m considering stocks such as Unilever, Britvic and GlaxoSmithKline. Those companies have seen their share prices ease back recently. But I’m prioritising them for further research because the prospects for the underlying businesses look attractive to me. However, good performance isn’t guaranteed just because I like these stocks now.
All shares carry risks. Nevertheless, I’d aim to add these stocks to my diversified dividend-share portfolio.