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Income seekers alert: How to build a dividend paying portfolio

by , 26 August 2014

If you're looking to invest for income, dividend paying shares are a great place to start.

So if you want to build a dividend portfolio, where should you begin?

Let's take a closer look…

Finding the right dividend paying shares

The first thing you need to do it find shares to put into your dividend paying portfolio. You tend to find that the larger companies on the Johannesburg Stock Exchange pay the most reliable dividends.

A company paying dividends is a sign of a good business, the team of experts at The South African Investor explain. It shows that the company’s making money and it gives a portion of its profits back to its shareholders in the form of dividends.

If you can find companies that consistently increase their dividend payments, that’s an even better sign. It shows that the company’s growing its earnings and profits.

Picking dividend paying shares

Check a company’s dividend yield. Divide a company annual dividend payments by the current share price. You can find a company’s dividend yield on many financial sites for JSE-listed stocks.

The dividend yield tells you what percentage of its share price a company pays in dividends. The higher this percentage, the higher the dividend payment is in relation to the company’s share price.

Then check a company’s dividend pay-out ratio. You can calculate this by dividing the dividend per share by the earnings per share.

The dividend pay-out ratio tells you how much of a company’s earnings go into its dividend. It’s a good indicator of whether the company can maintain paying a dividend at its current level.

Setting up your dividend paying portfolio

If you’ve got a lump sum for your dividend paying portfolio, just divide your lump sum by the number of companies you want to invest in.

For example, if you have a lump sum of R100,000 and you want to invest in five different companies, you’d invest R20,000 into each company.

You can then decide what you want to do with the dividends once they start coming in. You can read more about that here.

So there you have it, how to build a dividend paying portfolio.

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Income seekers alert: How to build a dividend paying portfolio
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