By David Richardson in intermediate — 07 Nov 2025

Constructing Your Dividend Portfolio

Building a dividend portfolio requires three distinct steps: screening (filtering the universe), evaluation (studying candidates closely), and assembly (building a coherent whole).

Screening, Selection, and Assembly

“Screeners get you to the right neighborhood—good research gets you to the right house.” — Charles B. Carlson

Building a dividend portfolio requires three distinct steps: screening (filtering the universe), evaluation (studying candidates closely), and assembly (building a coherent whole). This article guides you through each phase, helping you move from theory to practice.

Dividend investing requires discernment. Not all dividend-paying stocks are created equal. A stock yielding 10% might be a value opportunity or a trap. A company with 5 years of dividend growth might be on the cusp of a raise or facing headwinds. Screening helps you filter efficiently; evaluation helps you think clearly.

Phase 1: Screening: Creating Your Universe

Screening is the first filter. It narrows the universe of 5,000+ stocks down to a manageable handful worthy of deeper analysis.

Key Quantitative Screens

1. Dividend Yield: Target Your Range

What yield are you seeking?

Low yield (1–2%): Typically growth-oriented dividend stocks, lower risk of cuts, but limited current income. Examples: Microsoft, Johnson & Johnson.
Moderate yield (3–5%): The "sweet spot" for many dividend investors. Implies mature business with real cash generation, less risk of unsustainable payout. Examples: Utilities, some financials.
High yield (6%+): REITs, BDCs, pipelines. Higher current income but higher risk and often lower growth. Yields this high often signal risk.

Important: Set a range, not a single target. If you're looking for 4% yield, screen for companies yielding 3.5–5%. This gives you flexibility rather than missing great candidates because they're 0.5% off your target.

2. Payout Ratio: The Sustainability Test

The payout ratio (annual dividends ÷ earnings) tells you whether the dividend is sustainable.

Healthy range: 30–50% for most industries. The company keeps 50–70% of earnings for reinvestment and reserves.
Utilities and REITs: 70–90% is acceptable because their cash flows are stable and regulated.
Warning signs: Above 100% (unsustainable), or rising sharply year-over-year (company in distress, cutting earnings).

Screen for companies with payout ratios within healthy ranges for their industry. Avoid companies trending toward 100%+ payout unless the business is so stable (like a utility) that this is normal.

3. Dividend Growth History: Consistency Matters

Look for companies with consistent dividend increase histories:

5+ years of increases: Solid track record; shows management commitment.
10+ years of increases: Strong signal of business durability and management discipline.
Dividend Aristocrats (25+ years): Elite tier. Aristocrats have survived recessions and still raised dividends.

Practical screening approach: Filter for companies with at least 5 years of consecutive dividend increases as a baseline. This immediately eliminates companies that initiated or suspended dividends recently.

4. Free Cash Flow Coverage: Is the Dividend Real?

Free Cash Flow Coverage = Operating Cash Flow ÷ Dividends Paid

A healthy ratio is 1.5+, meaning the company generates $1.50 in operating cash for every $1 of dividend paid.

Why does this matter? Accounting earnings can be manipulated through aggressive depreciation, revenue timing, or one-time gains. Cash cannot. If a company's payout ratio (earnings-based) looks fine but FCF coverage is weak, the dividend may not be sustainable.

Screen for FCF coverage above 1.2 minimum; 1.5+ is better.

5. Debt-to-Equity Ratio: Leverage Risk

High leverage (debt relative to equity) increases risk, particularly when interest rates are rising. A company that can't afford rising interest payments might cut dividends to preserve cash.

Healthy range: 0.5–1.0 for most companies.
Warning signs: Above 2.0, or rising sharply.

Screen for reasonable leverage within your industry. Utilities often run higher leverage (they're stable); growth companies should run lower.

6. Fees and Expenses

The securities you choose for your dividend yield may have certain annual expenses that can eat into your returns. If you find two securities yielding the same, check if their structures include any fees that are deducted from returns before payment. Single stocks generally do not incur such a fee. However Exchange Traded Funds (ETFs), Closed End Funds (CEFs), Index Funds and other structured vehicles can charge you a management fee in the background that can be surprising. Highly efficient funds might charge 0.1% annual expenses – or even less. Highly managed funds and ETFs are known to incur fees regularly as high as 1.3%. As we reflect on the power of reinvestment and compounding, that “1%” can make a material difference in your returns over time.

Practical Screening Tools

Several tools help automate this process:

Stock Rover: Comprehensive screener with dividend-specific filters.
Dividend.com: Free screener focused on dividend metrics.
Yahoo Finance: Free screener with customizable dividend filters.
Your broker's tools: Most brokers (Fidelity, Schwab, etc.) offer free screening.

Don't let the screen be your finish line. Let it be your starting line.

A screen that shows 50 companies meeting your criteria is a starting point, not an answer. The real work begins with evaluation.

Phase 2: Evaluation: Studying Candidates Closely

Once you've screened and identified 5–15 candidates, the real work begins: understanding whether each company can sustain and grow its dividend.

Qualitative Factors That Matter

1. Competitive Moat: Durability of the Business

Does the company have durable advantages that protect its profitability? Look for:

Brand power: Coca-Cola, Apple, Microsoft have powerful brands that command loyalty and pricing power.
Ecosystem lock-in: Microsoft's enterprise software ecosystem keeps customers. Apple's ecosystem keeps consumers.
Cost advantages: Wal-Mart's supply chain and scale make it hard for competitors to match.
Regulatory advantages: Utilities have geographic monopolies.
Patent/IP: Pharmaceutical companies rely on patent protections.

A company with a strong moat can maintain profitability even during downturns, making its dividend safer. A commodity business without differentiation is more vulnerable.

2. Management Philosophy: Is Dividend Growth Part of the Culture?

Read management's commentary. Do they regularly discuss dividend policy? Do they have a stated goal of consistent increases? Do they prioritize shareholder returns?

Compare two companies:

Company A: CEO's letter emphasizes "returning capital to shareholders through consistent dividend growth is a core priority."
Company B: CEO's letter emphasizes "reinvesting all earnings into R&D and expansion."

Company A signals that dividends are strategic and valued. Dividend cuts are less likely because management has publicly committed. Company B signals that growth takes priority; dividends may be at risk if growth slows.

3. Industry Trends: Is the Sector Declining?

Avoid industries in permanent decline. For example:

Landline telephony: Replaced by mobile and VoIP. Telecommunications companies pivoted; those that didn't faced dividend pressure.
Print media: Replaced by digital. Newspaper stocks have seen dividend cuts as advertising revenue collapsed.
Brick-and-mortar retail: Pressured by e-commerce. Retail REITs face headwinds.

Conversely, look for industries with tailwinds:

Healthcare: Aging population drives demand.
Infrastructure: Government investment and urbanization support utilities and transportation.
Financial services: Essential and stable.

Josh Peters emphasizes: "Dividends are more than numbers; they reflect character - the character of management and the durability of the business."

4. Recent Earnings Trends: Is Business Strengthening or Weakening?

Look at the past 5 years of earnings per share (EPS) and free cash flow. Are they growing, flat, or declining?

Growing EPS/FCF: The company is getting stronger. Dividend growth likely continues.
Flat EPS/FCF: Business is stable. Dividend likely holds.
Declining EPS/FCF: Business is under pressure. Dividend cut risk is rising.

5. Valuation: Is the Price Reasonable?

Even great companies can be bad buys at the wrong price. Compare the company's valuation (price-to-earnings ratio, dividend yield) to its historical average and peers.

A company trading at a 20% premium to its 5-year average might still be a good long-term hold, but you're paying up.
A company trading 20% below its average might be a bargain, or it might be cheap because fundamentals are deteriorating.

Context matters. Look at why valuation is where it is.

Avoiding Dividend Traps: Red Flags

Dividend traps are stocks that look attractive (high yield, consistent history) but are actually deteriorating. Here's how to spot them:

Red Flag #1: Yield Spikes Suddenly

If a dividend stock's yield jumps from 4% to 8% in a few months, ask why. Usually it's because the stock price crashed and sophisticated investors are selling, not buying. A crashed price with unchanged dividend signals trouble ahead.

Red Flag #2: Payout Ratio Climbing

If a company's payout ratio rises from 40% to 80% in 1–2 years, the company is distributing more relative to earnings. This often signals earnings pressure. Track payout ratio trends, not just current levels.

Red Flag #3: Dividend Growth Slowing

If a Dividend Aristocrat has raised its dividend 5%+ annually for 20 years, then suddenly raises only 1%, something's changed. Earnings might be under pressure, or management might be signaling caution. Investigate.

Red Flag #4: Management Turnover or Strategic Shifts

A new CEO might deprioritize dividends in favor of acquisitions or R&D. A strategic shift might fundamentally change the business. Monitor these changes.

Red Flag #5: Industry Disruption

If your company operates in an industry facing disruption (e.g., traditional retail in the age of e-commerce), be cautious. The company might survive, but dividend pressure is real.

Red Flag #6: Credit Stratification Risk

As fixed-income specialist James Hymas notes in his portfolio construction research, credit quality clustering poses hidden portfolio risk. During economic downturns, companies tend to cluster by credit tier. Strong companies get stronger while weak ones deteriorate more sharply. A portfolio that looks diversified by sector might actually be clustered by credit quality. For example, you might own several "solid" dividend stocks that all face similar challenges: telecom companies competing on price, retail stocks pressured by e-commerce, or bank stocks sensitive to interest rates. When conditions deteriorate, all these positions may suffer simultaneously.

To mitigate this risk, diversify deliberately by credit quality, not just by sector. Mix investment-grade stocks (fortress balance sheets, Dividend Aristocrats), solid mid-tier dividend payers (modest growth, reasonable leverage), and some higher-yield/higher-risk positions. This stratification helps your portfolio weather downturns better than owning 10 similar-quality stocks across different sectors.

Phase 3: Assembly: Building a Coherent Portfolio

Once you've evaluated candidates, the question becomes: How do you assemble them into a portfolio?

Core vs. Satellite Approach

Core holdings (60–70%): Stable, quality dividend-growth stocks. These are your portfolio's foundation: Dividend Aristocrats, large-cap utilities, established healthcare companies. You expect these to hold for decades.

Examples: Johnson & Johnson, Procter & Gamble, Coca-Cola, utilities, healthcare REITs.

Satellite holdings (20–30%): Higher-yield or more speculative positions. These add current income or sector diversification but carry more risk.

Examples: BDCs, energy MLPs, telecom stocks, higher-yielding REITs.

Opportunistic holdings (10%): Small positions you're watching. These can be smaller dividend growers or turnarounds you believe in but haven't fully sized.

Diversification Principles

1. Sector Balance

Avoid concentrating your portfolio in one sector. A common mistake: buying 10 Dividend Aristocrats, only to realize they're mostly healthcare and consumer staples. Diversify across:

Healthcare & Pharma
Consumer & Staples
Industrials
Financials
Real Estate (REITs)
Utilities
Energy
Technology (smaller dividend allocations here, but growing)

2. Company Size

Balance large-cap, mid-cap, and small-cap dividend payers:

Large-cap (over $50B market cap): More stable, liquid, lower growth. Johnson & Johnson, Coca-Cola.
Mid-cap ($10B–$50B): More growth potential, more volatility. Regional banks, mid-tier industrials.
Small-cap (under $10B): Higher growth, higher risk, less liquid.

3. Geography

Consider international exposure. Many Dividend Aristocrats and strong dividend payers operate globally. If you buy Nestlé, Unilever, or BASF, you get international diversification.

4. Account Placement

Tax efficiency matters. Generally:

Taxable accounts: Qualified-dividend stocks (most large-cap US companies), which receive favorable tax treatment.
Tax-advantaged accounts (IRAs, 401ks): Ordinary-dividend vehicles (REITs, BDCs, MLPs), which are taxed at ordinary rates. In a tax-deferred account, this tax drag disappears.

Portfolio Sizing: How Many Holdings?

Of course, your investable assets, personal risk profile and investment goals will flavor your portfolio mix, but diversity of holdings has some general guidelines you should apply:

Too few (3–5): High concentration risk. One bad pick or sector downturn hurts significantly.
Too many (30+): Difficult to monitor, dilutes your best ideas, overlaps increase.
Optimal (6–20): Enough diversification to reduce single-company or single index risk, but focused enough to truly know what you own.

Each holding should represent 3–7% of your portfolio.

Watch out if you include funds-of-funds or industry/sector ETFs that invest in a portfolio themselves. This is where shadow (accidental) overlapping of the same holding can appear in your portfolio and can create more risk or participation in a particular security than you intended.

Monitoring Your Portfolio

Construction is step one; monitoring is ongoing. As investment principles emphasize, portfolios should be constructed and maintained intentionally from the top down, adding positions when dealers and companies make attractive instruments available rather than forced buying during unfavorable periods.

Quarterly Review

After each company reports earnings:

Did earnings grow or decline?
Is the dividend still safe (payout ratio, FCF coverage)?
Did management discuss any strategic changes?
Did management maintain or raise the dividend guidance?

Annual Rebalancing

Once yearly, review your sector allocations and company positions:

Have any holdings grown so large they dominate the portfolio? Trim.
Have any held underperformed expectations? Investigate or trim.
Have any sectors become overweight? Rebalance.

Five-Year Review

Every 5 years, step back and assess your entire portfolio:

Are your dividend-growth stocks still growing dividends?
Have any companies become yield traps?
Does your portfolio still match your goals and risk tolerance?
Would you buy each holding today at current prices?

Conclusion: From Screening to Mastery

Construction is where dividend investing moves from theory to practice. The screener finds candidates; evaluation determines quality; assembly creates a coherent portfolio. This discipline, combining quantitative screens, qualitative judgment, and diversification principles, separates successful dividend investors from those who chase yield without thinking.

The portfolio you build should reflect not just current yields, but your confidence in each company's ability to sustain and grow its dividend for decades. That confidence comes from doing the work.