Strategically Building A $100,000 Dividend Portfolio With Only 2 ETFs And 5 Stocks (2024)

Investment Thesis

When constructing an investment portfolio from scratch, investors often underestimate the associated risk level with their respective choices. An investment portfolio with a disproportionally high-risk level suggests that the probability of reaching successful investment results is comparatively low.

In today's article, I will outline a strategy for allocating $100,000 among two ETFs and five individual companies. The goal of this dividend portfolio is to provide you with an attractive combination of dividend income and dividend growth while minimizing risks, significantly enhancing your chances for successful investment results.

Moreover, I will demonstrate that the constructed dividend portfolio is diversified across companies and sectors, suggesting a reduced company and sector-specific concentration risk, which leads to a lowered overall risk level for this dividend portfolio.

I will also show that 37% of this dividend portfolio is allocated to large-cap value companies, further emphasizing the portfolio's reduced risk level.

Within this risk analysis, I will show you that the chosen companies feature appealing Payout Ratios, indicating potential dividend enhancements in the future. In addition to that, the selected companies have shown significant dividend growth rates over the past years. These metrics are key indicators of the sustainability of the companies' dividends.

Focusing on sustainable dividend-paying companies as key components of your dividend portfolio ensures that you can increase your extra income via dividends steadily and on an annual basis.

Furthermore, I will illustrate that four of the five largest holdings of this dividend portfolio play a crucial role in reducing portfolio volatility. This is evidenced by the fact that four of five holdings exhibit a 24M Beta Factor lower than 1.

The dividend portfolio I am presenting today offers a Weighted Average Dividend Yield [TTM] of 3.70%, accompanied by a Weighted Average 5 Year Dividend Growth Rate [CAGR] of 8.49%, indicating that investors can effectively combine dividend income and dividend growth through its implementation.

I have included the following two ETFs and five individual companies as part of this dividend portfolio:

• iShares Core High Dividend ETF (HDV).
• Schwab U.S. Dividend Equity ETF (SCHD).
• Realty Income Corporation (O).
• Main Street Capital (MAIN).
• Ares Capital (ARCC).
• Visa Inc. (V).
• Apple Inc. (AAPL).

Overview of the 2 Selected ETFs and 5 Individual Companies That Are Part of This Dividend Portfolio

Source: The Author, data from Seeking Alpha

Risk Analysis of The Current Composition of This Dividend Portfolio

Conducting a comprehensive risk analysis is essential for enhancing your chances of achieving successful investment outcomes.

Risk Analysis of the Portfolio Allocation per Company/ETF

The two chosen ETFs (HDV and SCHD) jointly comprise 80% of the overall investment portfolio, with each accounting for 40%. This ensures extensive diversification and a reduced portfolio risk level while effectively blending dividend income with dividend growth.

Representing 5%, Apple constitutes the portfolio's largest individual component. This also reflects the composition of my private investment portfolio, in which Apple represents the largest position due to its outstanding risk-reward profile.

Visa, Main Street Capital, and Realty Income each comprise 4% of this dividend portfolio. I am confident that these selections showcase compelling risk-reward profiles, offering investors a comparatively low-risk level and an elevated chance of successful investment outcomes.

I have allocated 3% of the overall portfolio to Ares Capital, a smaller percentage compared to the companies mentioned previously. This decision is a result of Ares Capital's elevated risk profile.

The company's relatively high Payout Ratio of 80.67% indicates an increased risk of a dividend reduction. By providing it with a reduced proportion of the overall portfolio, I aim to mitigate the potential impact of a dividend reduction on the portfolio's Total Return.

Risk Analysis of the Company-Specific Concentration Risk When Allocating HDV and SCHD Across the Companies They Are Invested in

The graphic below displays the largest holdings in this dividend portfolio, breaking down the allocations of HDV and SCHD across their respective invested companies. This illustration is important as it helps to identify the company-specific allocation risk, ensuring that no single company constitutes a disproportionally high share in relation to the overall investment portfolio.

Due to the careful construction of this dividend portfolio, no single holding account for more than 5% of the overall investment portfolio, underscoring its decreased risk level.

When breaking down HDV and SCHD across the companies they are invested in, Apple represents the largest holding of this portfolio (accounting for 5%).

The second largest proportion is AbbVie (with 4.23%), even though the company is not included as an individual position. However, both HDV and SCHD have a significant stake in AbbVie.

The third, fourth, and fifth largest individual holdings of this dividend portfolio are Visa (4%), Realty Income (4%) and Main Street Capital (4%). All other holdings account for less than 4% of the overall portfolio.

It is worth highlighting that the graphic below only illustrates holdings that have a proportion of more than 1.5% compared to the overall portfolio (therefore, the sum of all the holdings does not equal 100%).

Risk Analysis: Analyzing the 5 Holdings with the Largest Proportion of This Dividend Portfolio

Those holdings with the largest proportion of the overall investment portfolio are pivotal in determining the Total Return. Therefore, the adequate selection of these companies is crucial for the long-term investment results of an investment portfolio.

Analysis of The Payout Ratios of the 5 Largest Holdings

As mentioned previously, Apple (5%), AbbVie (4.23%), Main Street Capital (4%), Realty Income (4%) and Visa (4%) represent the five largest holdings of this dividend portfolio, when breaking down HDV and SCHD across their respective companies they are invested in.

In the following, I will take a closer look at the companies' Payout Ratios. Generally, the lower the Payout Ratio of a company, the lower the probability of a dividend cut tends to be.

It is worth noting that Apple (with a Payout Ratio of 15.36%) and Visa (21.35%) have by far the lowest Payout Ratios of the five largest holdings of this dividend portfolio, suggesting that the probability of a dividend cut is lowest for these companies.

With a Payout Ratio of 49.66%, AbbVie still provides investors with a reduced risk of a potential dividend reduction.

Main Street Capital (68.15%) and Realty Income (73.97%) exhibit Payout Ratios which are significantly above the companies previously mentioned, but still below 80%. For this reason, I consider the probability of a dividend reduction for these companies to be relatively low.

The relatively low Payout Ratios of the five largest holdings serve as meaningful indicators of the portfolio's minimized risk level, suggesting a heightened probability of realizing favorable investment outcomes.

Analysis of the Dividend Growth Rates of The 5 Largest Holdings

The Dividend Growth Rate is an indicator of the financial health and the growth outlook of a company since it indicates that the company can increase its dividend on an annual basis.

It is worth highlighting that each of the five largest individual holdings of this dividend portfolio exhibits a 3-Year Dividend Growth Rate [CAGR] that exceeds 4%.

Visa is the company with the largest 3 Year Dividend Growth Rate [CAGR] (15.30%), followed by Main Street Capital (10.42%), AbbVie (7.36%), Apple (5.57%), and Realty Income (4.09%).

The positive 3 Year and 5 Year Dividend Growth Rates of each of the five largest holdings of this dividend portfolio are additional indicators of its relatively low-risk level. This strengthens my belief that you will reach positive investment outcomes with a high likelihood when following this portfolio's investment strategy and allocation approach.

Analysis of the 24M and 60M Beta Factors of The 5 Largest Holdings

The Beta Factor is another crucial indicator for the risk level of an investment portfolio since it measures the volatility of a stock compared to the broader stock market. A Beta Factor below 1 indicates a lower volatility in comparison to the broader stock market.

It is worth noting that four of the five largest holdings of this portfolio boast a 24M Beta Factor below 1: AbbVie (0.44), Realty Income (0.65), Main Street Capital (0.77) and Visa (0.94). Only Apple has an elevated volatility when compared to the broader stock market, exhibiting a 24M Beta Factor of 1.2.

The low 24M and 60M Beta Factors of the largest holdings of this portfolio serve as additional indicators of its reduced risk level.

Risk Analysis of the Portfolio's Sector-Specific Concentration Risk When Distributing HDV and SCHD Across the Sectors they are Invested in

The graphic below displays the portfolio's diversification across sectors when breaking down HDV and SCHD across their respective sectors they are invested in.

This illustration is important to identify and reduce sector-specific concentration risk, which helps to lower the overall risk level of an investment portfolio and to increase the chances of positive investment outcomes.

It can be highlighted that the Financials Sectors accounts for the largest share of the overall portfolio, representing 20.59%. The second largest sector is the Healthcare Sector, accounting for 15.99%.

The third largest is the Information Technology Sector (13.81%), followed by the Consumer Staples Sector (12.01%), and the Energy Sector (11.95%). The Industrials Sector represents 7.71% of the overall portfolio.

All other sectors, such as the Communication Services Sector (4.22%), Consumer Discretionary Sector (4.19%), Real Estate Sector (4.01%), Utilities Sector (3.95%), and the Materials Sector (1.57%) account for less than 5% of the overall portfolio, indicating a comparably low sector-specific concentration risk.

Only the Financials Sector (20.59%) and the Healthcare Sector (15.99%) account for more than 15% of the overall portfolio, once again, underscoring the portfolio's reduced sector-specific concentration risk and decreased overall risk level.

Risk Analysis of The Equity Style of This Dividend Portfolio

The graphic below displays the equity style of this dividend portfolio when breaking down HDV and SCHD across their respective equities, further underscoring the lowered risk level.

71% of companies are large-cap companies, while 22% are mid-cap companies and 7% are small-cap companies.

Small-cap companies, which tend to have an elevated risk level when compared to large-cap and mid-cap companies, are underrepresented in this portfolio, serving as an additional indicator of their reduced risk profile.

In addition to that, it can be highlighted that 51% of the selected companies are value companies, 38% are core companies (which combine value and growth) while only 11% are pure growth companies.

The fact that 37% of the selected picks are large-cap companies with a focus on value, once again underlines the portfolio's reduced risk level.

The Additional Advantages of The Dividend Income Accelerator Portfolio in comparison to This Dividend Portfolio

The dividend portfolio I have introduced you to in this article presents several benefits for investors, such as an attractive mix of dividend income and dividend growth and the minimization of risk. This dividend portfolio exhibits a Weighted Average Dividend Yield [TTM] of 3.70% and a Weighted Average 5 Year Dividend Growth Rate [CAGR] of 8.49%.

Compared to the portfolio presented in today's article, it can be highlighted that The Dividend Income Accelerator Portfolio provides investors with an even higher Weighted Average Dividend Yield and Weighted Average Dividend Growth Rate.

The article below demonstrates in greater detail the characteristics and goals of The Dividend Income Accelerator Portfolio:

The Construction Of The Dividend Income Accelerator Portfolio

The Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio presently stands at 4.40%, accompanied by a 5-Year Weighted Average Dividend Growth Rate [CAGR] of 8.95%. This indicates that it is a superior choice for investors looking to balance dividend income and dividend growth, while, at the same time, investing with a reduced risk level to achieve attractive results with a high likelihood.

The article below describes in greater detail the current composition of The Dividend Income Accelerator Portfolio after the recent incorporations of Nike and Exxon Mobil:

Combining Strengths: 2 Undervalued Market Leaders For Balanced Dividend Income And Dividend Growth

Conclusion

When constructing a dividend portfolio from scratch with a limited number of individual companies, it is vital to carefully choose the ETFs and firms that will be part of such a portfolio. This careful selection process is crucial to ensure that the risk level of your portfolio does not become excessively high. A high-risk level correlates with a lower probability of successful investment results.

To assist you in constructing a dividend portfolio from the ground up, I have shown you how you could allocate the amount of $100,000 across two ETFs and five individual companies. While you are free to invest any other amount, maintaining the same proportional allocation is crucial for replicating similar investment results.

After analyzing and selecting the respective investment options, I have structured the portfolio in a way to ensure that no individual company accounts for more than 5% of the overall portfolio, even when breaking down the two ETFs (SCHD and HDV, which collectively account for 80% of the overall portfolio) across their respective holdings. This strategy effectively minimizes company-specific allocation risk.

In addition to that, I am confident in the potential of the 5 largest holdings of this portfolio: Apple (with 5.00% of the overall portfolio), AbbVie (4.23%), Visa (4%), Realty Income (4%), and Main Street Capital (4%). I am convinced that each of them offers a compelling risk-reward profile, providing investors with the chance to obtain attractive investment results with a relatively high probability.

Within the overall composition of this dividend portfolio, only the Financials Sector (with 20.59% of the overall portfolio) and the Health Care Sector (with 15.99%) exceed a 15% allocation. All other sectors represent less than 15% compared to the overall portfolio, indicating a strategic diversification that lowers the sector-specific concentration risk while demonstrating the portfolio's balanced composition.

The reduced risk level of this dividend portfolio is further underlined by its five largest holdings exhibiting a relatively low Payout Ratio (only Realty Income's Payout Ratio slightly exceeds 70%) and their positive 3-Year and 5-Year Dividend Growth Rates. Moreover, four out of the five largest holdings have a 24M Beta Factor below 1, further underscoring the portfolio's reduced volatility and low level of risk.

Compared to the dividend portfolio discussed today, it can be highlighted that The Dividend Income Accelerator Portfolio provides investors with an even higher Weighted Average Dividend Yield [TTM] (4.40% compared to the 3.70% of this dividend portfolio) and an even higher Weighted Average 5-Year Dividend Growth Rate [CAGR] (8.95% compared to 8.49%).

I plan to publish an article about the most recent acquisitions for The Dividend Income Accelerator Portfolio next week. These acquisitions will further diversify the portfolio while combining dividend income and dividend growth. The goal is to continue amplifying benefits for those who follow The Dividend Income Accelerator's investment approach, assisting them in achieving an attractive Total Return with a high likelihood.

Author's Note: Thank you for reading! I would appreciate any feedback on this dividend portfolio allocation article and any thoughts on the two selected ETFs and five individual companies!

I specialize in constructing investment portfolios aimed at generating additional income through dividends. My focus lies on identifying companies with significant competitive advantages and strong financials that can provide you with an attractive Dividend Yield and Dividend Growth, thus enabling you to augment your dividend income annually. By combining high Dividend Yield and Dividend Growth companies, you can gradually reduce your dependence on the broader stock market fluctuations.I also assist you in achieving a well-diversified portfolio across various sectors and industries. This diversification strategy aims to minimize portfolio volatility and mitigate risk. I also suggest incorporating companies with a low Beta Factor, which further contributes to reducing the overall risk level of your investment portfolio. My suggested investment portfolios commonly consist of a blend of ETFs and individual companies, emphasizing broad diversification and risk reduction.The selection process for high dividend yield and dividend growth companies within the investment portfolio is meticulously curated. I prioritize the pursuit of total return, encompassing both capital gains and dividends, rather than solely focusing on dividends in isolation. This approach ensures that your portfolio is designed to maximize returns while considering the full spectrum of potential income sources. By leveraging my expertise, you can benefit from a well-crafted investment portfolio that aims to generate extra income through dividends, while reducing risk through diversification, and prioritizing total return.