Build a smart dividend portfolio you can trust (3 easy steps to $)

Are you new to self-directed investing and don’t know exactly where to start?

With so many companies to choose from and so many factors to consider, it certainly can feel a bit overwhelming.

I’ve devised a way to build a portfolio I can trust in any market (even during a recession).

Let me walk you through my 3 easy steps to building my monster dividend portfolio.

If you find it helpful, maybe you can apply some of the things you learn to your own investing journey.

Modern trading tools have made the process of building a dividend portfolio you can trust easier than ever. (Image licensed under the Unsplash+ License)

Step 1: Identify and only invest in companies you personally use every single month

I have a personal Golden Rule I apply to investing, and it goes like this: I only invest in companies that I use every single month.

There are two main advantages to this approach.

By only investing in companies that I use every single month, I’m effectively putting money back in my own pocket every time I spend with them.
I can be confident that the company provides an excellent and/or essential product or service — otherwise, I wouldn’t use them!

Why do I insist on sticking to companies I use monthly?

One word: cash flow.

Cash flow is a company’s lifeblood and can sustain it in a deep recession like the one I believe we’re going to hit either late this year or next.

People also tend to cut back on “extras” in those kinds of economic conditions as well.

So for example, I use Expedia to book all my travel, but I don’t own the company.

Why? Because I don’t use it every single month. Travel involves big, one-time purchases. As a luxury, it’s usually one of the first things to go when economic times get tough.

Examples of holdings

One company I own is MasterCard.

Like most people, I use a credit card almost every day, and every transaction I make with one generates revenue for the company. I don’t carry a balance on my cards, but interest is another source of income for MasterCard.

Another example is Microsoft.

Not only do I use its operating system, email, and software for personal and business tasks, my workplace applications (Outlook, Word, Teams, etc.) are all provided by the same company.

(Sneaky side note: if you’re bullish on Artificial Intelligence and want to invest in OpenAI and ChatGPT, Microsoft is one of the company’s partners).

As you might imagine, Microsoft is one of my biggest holdings, and bonus (!), it pays a dividend.

This is going to be a really fun exercise for you: Over the next few days, make a list of all the companies you use every month.

It’s interesting to look around your life and see just how many public companies have a presence in it.

Step 2: Invest over time with small buys on red days

I only build positions over long periods of time and when the market is offering me a discount.

As I wrote here, I love red days on the market.

Long stretches of green bore the heck out of me. Red days represent opportunities.

Red days are like a sale at the mall, only you’re not wasting your money on some trash trinket — you’re buying a piece of a company that pays you to own it.

If I want to own the stock anyway, why not pick it up at a discount?

How do you build positions over time if the company’s share price is exorbitant and you don’t have that much capital?

Well, actually, you can get started for as little as $1 per day using the magic of fractional trading.

Trading platforms like Robinhood and SoFi offer commission-free trading that allows you to buy even smaller pieces — fractions of shares — of the companies you’re interested in.

Here’s an example from my portfolio: I love Costco. I shop there every week and it gives me a big discount on my grocery bill (which is sizeable given I have two growing boys in my house).

But Costco shares, at the time of this writing, are a seemingly unattainable $492 each.

No matter: every time I add to my Costco position, I do so just $2 at a time. And I do this for each of my 40+ holdings.

By approaching it this way, you can build positions in the companies over time and reduce the effects of market volatility.

Put another way, if you have $5,000 to invest, you won’t get into a situation where you put all $5,000 worth into the market on Friday and then walk smack dab into a stock crash on Monday.

You can invest that money over time in a diversified portfolio, thus massively reducing your risk.

Step 3: Know when to sell

The beauty of this strategy is that you always know when to sell: when you stop using the company’s products or services!

One example I like to give is Netflix.

Yes, I currently have a position in the streaming giant because it’s the first app my family members open when they want to watch TV.

But Netflix has been raising its prices a lot, and I might decide at some point that the value I’m getting from the service doesn’t match the cost. Or perhaps management will change and content offerings will get worse.

Whatever the reason, if I decide to cancel the service, I’ll also cancel my investment in the company.

Simple!

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The views in this article are the personal views of the author. This commentary is provided for general informational and entertainment purposes only and should not be construed as financial, investment, tax, legal or accounting advice. It does not constitute an offer or solicitation to buy or sell any securities referred to. Consult your financial advisor prior to making financial decisions.

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