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2 tips for building an ASX dividend income portfolio

Although I would say almost every country has a patriotic bias towards the shares being offered on its own stock market, Australians have a particular fondness for our own home-grown stocks. That’s due in no small part to our system of dividend imputation (also known as franking). Building a dividend income portfolio with ASX shares can be especially lucrative due to the potent tax advantages of this framework.

Dividend investing is also often thought of as ‘conservative’ – probably due to the fact that the highest-yielding dividend players tend to be ASX blue-chips like the big four banks, Telstra Corporation Ltd (ASX: TLS) and Coles Group Ltd (ASX: COL).

But in reality, dividend investing can be just as risky as any other investing style – as shareholders in Telstra, Westpac Banking Corp (ASX: WBC) or AMP Ltd (ASX: AMP) would tell you.

With that in mind, here are 2 tips that I think would assist any investor trying to build an ASX dividend income portfolio.

Diversity is king

I think dividend investors more than any other kind have the most to benefit from a well-diversified portfolio. This is easier said than done, because I personally think that adequate income diversity comes from investing across different industries, different stock growth profiles and even different countries. Sometimes yesterday’s strongest performers are today’s weakest (again – the banks) and anyone chasing the returns of yesterday with high allocations is likely to be disappointed.

So if I was building an income portfolio for 2020, I would personally be seeking a range of income-paying shares across different sectors. Sure, Westpac and Telstra offer lots of income potential – but I would also be looking at stocks like Super Retail Group Ltd (ASX: SUL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Stockland Corporation Ltd (ASX: AGP) for a more well-rounded portfolio.

Don’t just chase large yields

You know what they say about big yields – small growth, that’s what. Often a large starting yield indicates a company is at a mature stage of its development and paying out most of its earnings as dividends instead of reinvesting for future growth. This in turn often means there is little prospect of significant capital appreciation or even dividend growth in its future.

I’m sure that anyone investing in shares for income would want a pipeline of growth in their portfolio rather than just a collection of the highest-yielding stocks. So I would consider an allocation of dividend growth stocks like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) or CSL Limited (ASX: CSL) in addition to your more traditional income shares. That way, you can be confident your portfolio will be throwing off more cash in a few years’ time.

Foolish takeaway

Finding high-yielding ASX shares is relatively easy but building a robust and balanced dividend portfolio… not so much, in my opinion. That’s why I think these 2 tips are worthy of consideration when you’re knocking up your own portfolio.

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Sebastian Bowen owns shares of Telstra Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited, Telstra Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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