Income from shares can be a useful addition to wages or a pension. That is why I have been building a dividend portfolio. If I wanted to start another one from scratch today, here is how I would go about it.
Setting objectives
I would want to be clear with myself about what I hoped to achieve. That would help shape my investment decisions. For example, I think I could build a portfolio with £5,000. Investing that amount may provide me with a few hundred pounds of extra income each year, but it is almost definitely not going to start throwing off thousands of pounds in annual dividends.
I would also want to be clear about tying up the money. Imagine I put £5,000 in a Stocks and Shares ISA then invest it in dividend shares. I cannot simply dip into that money whenever I need to, without selling shares. They may have gone down in price since I bought them, and selling would result in a loss. So I would set aside a spare £5,000, after having established an emergency fund, with the objective of leaving it invested in shares I felt could produce dividend income in future.
Risk management
In planning my portfolio, I would adopt a couple of risk management principles.
I would diversify across different shares, so if one did worse than I expected it would not hurt the whole portfolio too much. For example, sometimes a previous dividend payer suddenly cancels its dividend. With £5,000, I could invest £1,000 in each of five shares.
I would also focus on buying shares in quality companies I felt had strong business prospects, rather than just going after the highest dividend yields.
Shares for my dividend portfolio
What five shares would I buy right now?
Two are investment and asset managers. M&G and Abrdn benefit from strong brands and resilient long-term demand for financial services. But in the short term, I think volatile stock markets could lead to some customers switching funds to other providers, which is a risk to profits.
I would also happily buy shares in British American Tobacco. The owner of brands including Rothmans is a cash generation machine. That helps fund a generous dividend that has risen annually for over two decades. That may not continue – declining cigarette use in many markets is a risk to both revenues and profits. But I think the company may be able to continue growing, through a combination of acquisitions, pricing increases, and new product formats.
I would also buy the utility National Grid. The business owns the backbone of the UK distribution network, which gives it a strong competitive advantage. Rising electricity prices could lead to some users cutting back. But I think there should still be enough demand for electricity distribution to keep profits flowing at National Grid.
Finally I would buy shares in telecoms provider Vodafone. It also has a network that would be costly for a rival to match, as well as a strong brand. Ongoing capital expenditure costs may eat into profits, but I expect long-term customer demand to be buoyant.
Spending £5,000 on this dividend portfolio ought to earn me around £385 a year in dividends if the companies maintain their current payouts.