Building a dividend share portfolio may seem like a risky move at the present time. However, with the income returns from other assets such as cash and bonds being relatively low, dividend shares could prove to be a sound means of obtaining a passive income in the long run.
Through spreading your capital across a wide range of companies that offer dividend growth potential and solid financial positions, you could obtain a favourable risk/reward opportunity that produces an attractive income return in the coming years.
Spreading the risk
A dividend share portfolio should contain a wide range of businesses that operate in a variety of industries and economies. If it doesn’t, you are likely to be reliant on a small number of shares for your income. Should even a small number of them experience a challenging financial period, it could lead to disappointing returns that hurt your financial position.
Diversifying across multiple sectors and regions is likely to be even more important than usual at the present time. Some countries are experiencing greater challenges from coronavirus than others, while some industries are feeling the effects of lockdown to a greater extent than others. As such, by simply owning a range of businesses you not only reduce risks but also achieve a higher income return in what is likely to be an uncertain period for the world economy.
Dividend growth potential
When building a dividend share portfolio, it may be tempting to simply purchase those businesses that offer the highest yields. While this may produce an attractive income return in the current year, over the long run it may not be a sound move due to their lack of dividend growth.
As such, it may be a good idea to focus on yield and dividend growth potential. This may ensure that your passive income growth beats inflation and that you are able to improve your spending power. If this goal is not achieved, your passive income may be able to buy fewer goods and services as factors such as low-interest rates and quantitative easing could lead to higher inflation across the world economy.
A solid dividend share portfolio
At the present time, some shares may offer high yields for a good reason. For example, they may face challenging operating conditions that have caused their share prices to fall.
As such, before buying high-yielding companies within a dividend share portfolio it could be worth assessing their financial strength and outlook. By analysing their balance sheet strength, cash flow and economic moat, you can assess whether they offer a solid passive income over the long run.
By focusing your capital on the highest-quality companies available, you can reduce risk and increase your chances of obtaining a generous income return that improves your financial freedom in what could be a challenging period for the global economy.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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