Home Investments Be Careful What you Build Your Dividend Investment Portfolio On

Be Careful What you Build Your Dividend Investment Portfolio On

by My Journey to Millions

Building a portfolio with a growing dividend income stream may not be everyone’s goal, but if it is your goal, then much like building a house, your dividend investment portfolio has to have a strong foundation.  In my opinion that strong foundation is analogous to a long history of sustainable increasing dividends.  At the very lowest level, it instills a responsibility in current management that they have an upcoming bill that they have to pay to the people that employs them (i.e. the owners of the company).

Last week, many yield chasing investors were reminded about having a proper foundation when copper producer,  Freeport-McMoRan (FCX) absolutely destroyed their shareholder’s income stream,

slashing its dividend 84% – erasing a lucrative income stream for investors and serving up a big reminder these payments aren’t guaranteed.

The company, which explores for materials like copper and gold, announced it is cutting its quarterly dividend down from 31.25 cents a share down to just 5 cents. That’s a massive cut in an implied annual dividend of $1.25 a share to $0.20 a share.

Freeport’s cut is staggering. The reduction takes away $1.05 a share from investors – which is no small sum considering the company has 1.04 billion shares outstanding. All told that amounts to $1.1 billion in lost dividends. The executives will feel the loss, too. CEO Richard Adkerson will miss out on $1.6 million a year in lost dividends.

What makes this cut sting even more is that dividend reductions are extremely rare in the materials sector. There have only been 17 dividend cuts by companies in the S&P 500 materials sector in the past 10 years, including Freeport, says S&P Dow Jones Indices.


Building a Strong Dividend Growth Investment Foundation

First thing is first, as with all things having to do with the markets, there are no guarantees.  With that being said, I believe a good way to build a strong foundation is to rely on a company that has increased their dividends through multiple recessions and the disaster that was the 2008 market.  To find these companies there are two great resources:

While there are a few differences between the two dividend lists the main thing to remember is that they both provide equities who have increased their dividends at least 25 years (and some into the 50s+)!  Since 1990 there were 3 recessions, the dot com burst and the disaster that was 2008 – 2009 yet all the companies on both of these lists increased the amount they pay out to their shareholders year after year.

What other metrics would you suggest?

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Roadmap2Retire 03/30/2015 - 8:20 pm

The slash from FCX sure is painful. I have been thru that in the past – where my gold mining company cut its dividend (IAMGold), but the fundamentals are still strong, so I continue to hold to this day. Its been a complete dog in my portfolio though…but occasionally, I write covered call to generate a wee bit of income on that security.

Between the two lists, I think Dave Fish’s list is a better one as it does not depend on the fact that a company has to belong to S&P 500.


Evan 03/31/2015 - 8:56 am

Unlike other fundamentalists in this sub-sect of investing, I don’t think it is all that bad to hold on to an equity that doesn’t pay, or even cuts dividends, rather IF it is your goal to build such a portfolio then something like FCX (or likely the stock you mentioned) is where to start.

I also use Dave Fish’s list because of that very fact. Interesting note, if you ever have a question about the list he responds on his forum within 24 hours.

Jack 04/02/2015 - 6:09 pm

Since dividend yield is one criteria to compare dividend stocks on, I always look at trailing PE ratios to hopefully get an idea of if the stock’s over or under valued which could impact the yield.

DivHut 04/07/2015 - 3:23 am

True, no dividend is guaranteed. Not even companies with decades of increases behind them. Look at GE during the financial crisis cutting its dividend to preserve cash. As you mentioned all dividend income investors need to build solid foundations and not simply chase high yield. Thanks for sharing.


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