Many investors look to income-producing investments to generate passive income. Two of the most common investments to generate income are physical real estate and stocks or funds that pay a dividend. I love the idea of investing in physical real estate directly, but I simply don't have the time or patience to take on the responsibility. When I think about generating passive income from investing, it needs to be hassle-free with the least amount of obligations. I have become a fan of investing in quality companies or funds that pay dividends to their shareholders. By making a monetary investment in the company, I gain an equity share while being paid a portion of the profits through its dividend. Once I have allocated the capital, a minimal amount of housekeeping items are required, mainly skimming through quarterly and annual reports of each investment. The only future decisions I need to make are at what point do I take the cash instead of reinvesting the dividends and selling an investment due to developing changes in the overall business.
Dividends are distributions a company makes to its shareholders from the earnings generated from its overall business operations. Companies that pay dividends are well-established companies that can forecast revenue and profits to certain degree years into the future. A substantial amount of financial planning needs to occur to create and implement an ongoing dividend program. When I am vetting companies to add to my dividend portfolio in addition to their overall business and financials I look at their dividend yield, how many years they have paid a dividend, how many consecutive years of increases they have rewarded shareholders with, and what the payout ratio is?
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The number of companies and funds that pay dividends is immense, and selecting companies for a portfolio can become overwhelming at times. I have put together five ideas that can be viewed as building blocks for a diversified dividend portfolio. When building a dividend portfolio, I want the first investments to serve as a rock-solid foundation representing decades of previous dividends, potential future dividend increases, and generating a reliable yield on my capital. I believe the combination of The Coca-Cola Company (KO), Enbridge (ENB), Southern Company (SO), Realty Income (O), and the Schwab U.S Dividend Equity ETF (SCHD) creates a solid foundation for any dividend portfolio that can be expanded upon.
The Coca-Cola Company (KO)
The Coca-Cola Company is arguably the most iconic company worldwide. The Coca-Cola Company has been in business for 135 years, and its products are sold in more than 200 countries and territories globally. The Coca-Cola distribution system includes 225 bottling partners worldwide, 900 bottling plants, and 30 million customer outlets. In 2020 only 18% of Coca-Cola's global unit case volume came from North America as 28% was in Europe, Middle East & Africa, 23% Asia Pacific, 28% Latin America, and 3% came from Global Ventures. Throughout a global pandemic, The Coca-Cola Company operationally sold 1.9 billion servings each day throughout the 200 countries and territories they operate in. When you think about capital preservation and businesses with wide moats, Coca-Cola should be at the top of the list. Its products are enjoyed by roughly 25% of the global population daily.
The Coca-Cola-Cola Company paid its first dividend in 1920 and has not missed a dividend payment since placing them in the dividend century club. Long-term shareholders have enjoyed 59 consecutive years of dividend increases dating back to 1962. The Coca-Cola Company could be considered a quintessential dividend company for any investor as it's one of the few companies to be crowned a Dividend King. Coca-Cola is 1 of 31 companies considered Dividend Kings with the sole criteria of having increased its dividend for 50 or more consecutive years. Most people are impressed when companies join Dividend Aristocrat status, which signifies reaching 25 years of consecutive dividend growth.
Today, the Coca-Cola Company pays a dividend of $1.68 per share, a forward yield of 2.98%. Their payout ratio is 76.95%, with a 4.07% 5-year growth rate. I consider The Coca-Cola Company a dividend building block because of its 100+ years of paying annual dividends and its current 59 consecutive years of dividend increases.
Enbridge is one of the largest and most diverse energy infrastructure companies throughout North America. Enbridge operates four business segments: liquid pipelines, natural gas pipelines, gas distribution & storage, and renewable energy. To my knowledge, Enbridge is also the only energy infrastructure company that operates its own utility company. Enbridge operates 17,127 miles of active crude pipeline across North America, delivering more than 3 million barrels of crude oil and liquids daily. Enbridge transports about 25% of the crude oil produced in North America while being one of the largest players in the import/export arena. On the natural gas side, Enbridge operates 23,850 miles of pipelines that span 30 U.S. states, five Canadian provinces, and offshore in the Gulf of Mexico. Enbridge has the capacity to transport 16.2 Bcf of natural gas and has 158.9 Bcf of storage.
What sets Enbridge apart from other midstream operations is its utility and renewable energy business segments. Enbridge operates North America's largest natural gas utility by volume and third-largest by customer count. Enbridge Gas Inc. serves approximately 75% of Ontario residents, while Enbridge Gas and its affiliates deliver energy to roughly 15 million customers. Enbridge Gas Inc's network currently consists of 78,214 kilometers of gas distribution mainlines, 66,787 km of gas distribution service lines, and 5,471 km of gas transmission. Enbridge has diversified into renewable energy and is helping advance the transition to renewables. Within their portfolio of current and under-construction projects are 23 wind farms, seven solar energy operations, five waste heat recovery facilities, one geothermal project, one power transmission project, and one hydroelectric facility. Enbridge's total capacity once all of these projects are brought online will be 5,581.7 MW of capacity.
I consider Enbridge an essential building block for any dividend portfolio as investors have enjoyed collecting dividends over the past six decades. Enbridge continued to reward shareholders by increasing its dividend over the past 26 consecutive years. Since 1995, Enbridge has had an average compound annual growth rate of 10%. A critical piece of information pertaining to its dividend is that senior leadership has indicated dividend increases are not sacrificing financial stability. They plan to keep their payout ratio between 60-70% of their generated distributable cash flow. Enbridge has enough room in the tank to continue its 26 years of dividend increases and, by 2025 providing three decades of consecutive dividend increases. Today Enbridge yields roughly 7% and could be considered one of the most reliable high-yield investments available to investors.
The Southern Company (SO)
Utility companies have been long-term favorites among dividend investors. Utility companies provide critical infrastructure across the country and lack traditional competition, which is replaced with regulation from state, federal, and local agencies. Southern Company is one of the United States largest utility companies, with over 9 million customers receiving services from their seven electric & natural gas utilities. Southern Company operates more than 27,000 miles of transmission lines, 3,700 substations, and 300,000 acres of right of way. You won't find a larger utility company in the southeast of the United States. Southern Company operates 77 fossil and hydro plants, which provides power for more than 4.68 million customers through Southern Company Generation. I prefer to invest in companies with large moats protecting their businesses, and Southern Company ranks high on that list.
Since 1948 Southern Company has reward shareholders through its dividend program and has 73 years of dividend payments under its belt. Southern Company paused its annual dividend increases in 1997 and resumed this practice in the middle of 2002. Shareholders have received 19 consecutive years of dividend increases from Southern Company, and they are on the path to becoming a Dividend Aristocrat once again. Today Southern Company pays an annual dividend of $2.64 per share, a 4.18% forward yield. Their payout ratio is 79.37%, with a 5-year annual growth rate of 3.36%. Southern Company is a critical building block for any dividend portfolio as its infrastructure is unlikely to be replaced. Its dividend can go head-to-head with just about any company considering its current yield and long-term track record of payments.
Realty Income (O)
Included in my previous article on thestreet.com, Top 5 Ideas For Building A Diversified REIT Portfolio was Realty Income. When I think about building blocks for a dividend portfolio, Real Estate is high n the list. Real estate provides critical infrastructure to our economy, and this is also an area with large barriers of entry. Realty Income has become a staple in the real estate industry as some of the United States largest companies including Walgreens, Walmart, Home Depot, FedEx, CVS and 7-Eleven lease their retail locations from Realty Income. While others were experiencing vacancies during the pandemic, Realty Income maintained a 98% occupancy rate across their 6,600+ locations.
When reviewing the income statement from Realty Income, the critical financial metrics are trending upward. Over the previous three years, total annual revenue has increased from $1.22 - $1.64 billion, operating income from $656.2 - $800.2 million, funds from operations from $772.7 million - $1.14 billion, and adjusted funds from operations from $838.6 million to $1.17 billion. Realty Income has proven its real estate empire is built to withstand and thrive throughout the most adverse business environments while providing stable income to its shareholders through dividends.
Today, Realty Income pays a $2.83 annual dividend which is a forward yield of 4.06%. Unlike many other companies, Realty Income pays a monthly dividend rather than quarterly allowing investors to generate an ongoing income stream throughout the year. Realty Income is a member of the S&P 500 Dividend Aristocrat club, increasing its dividend for 26 consecutive years. Realty Income has also increased its dividend every quarter 94 consecutive times, creating dividend profile characteristics that are unrivaled. Realty Income offers a top-quality dividend with a long-standing track record of rewarding shareholders. By investing in Realty Income, you're becoming a landlord of America's largest companies indirectly without doing any of the work and generating monthly income.
Schwab U.S Dividend Equity ETF (SCHD)
I would consider the fifth building block for a diversified dividend portfolio the Schwab U.S Dividend Equity ETF (SCHD). Adding some dividend funds to your portfolio can be an excellent way to create a level of diversity that you wouldn't be able to achieve on your own instantly. SCHD generally invests in stocks that are included in the Dow Jones U.S Dividend 100 index. The Dow Jones U.S. Dividend 100 Index is designed to measure the performance of high dividend-yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.
Today SCHD has 104 individual holdings within its ETF. With every share of SCHD in your portfolio, you're gaining access to a diversified dividend fund containing the largest companies within the United States which have paid a minimum of 10 consecutive years of dividends. SCHD has an expense ratio of 0.06%, meaning that you're paying Schwab $6 on every $10,000 invested in SCHD. I would consider a $6 management fee on every $10,000 a steal, considering Schwab's management team is doing all the work for you. Try finding a financial advisor who will build out a diversified fund at 0.06%; it is highly unlikely.
SCHD pays a dividend of $2.19, which is a forward yield of 2.88%. SCHD has increased its annual dividend for the previous nine consecutive years and has a 13.02% 5-year growth rate. There are many dividend funds to choose from, but SCHD, in my opinion, is at the top of the list.
Examining the combination of these five dividend building blocks.
Investing in income-producing stocks is much different than seeking capital appreciation. In many ways, dividend companies are well-established entities that are not experiencing periods of hyper-growth. Unless we discuss Apple or Microsoft, which many wouldn't consider dividend investments as they both yield less than 1%, investors don't expect a company such as Southern Company to appreciate drastically. Often, investors are looking for stable companies that can generate income continuously and appreciate over time to protect their initial investment. By investing evenly across these investments, your average capital appreciation before dividends would be 90.96%.
The combination of Coca-Cola, Enbridge, Realty Income, Southern Company, and the Schwab U.S Dividend Equity ETF provides investors with 275 years of dividend payments and 139 annual increases. If you're looking to start or add to an income-producing portfolio, these are high-quality choices to consider. By purchasing 100 shares of each of these selections, you would generate $99.84 per month and $1,198.08 in annual dividend income, which is a 3.95% yield on your capital. Diversification is critical regardless of your investment goals. The combination of these five investments provides exposure to real estate, consumer goods, utilities, and energy while expanding your portfolio's reach into information technology, financials, consumer staples, industrials, healthcare, consumer discretionary, communication services, materials, and energy through SCHD.
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