How I Built a Dividend Growth Investment Portfolio

I remember the first time I read Warren Buffett’s annual letter to Berkshire Hathaway shareholders. It was witty, it was entertaining, and it wasn’t anything like your standard annual report with glossy pages, full color photos, and mind-numbing marketing-speak.

That first time, the page that blew me away was his list of stock investments – specifically the dividend producing stocks.

Berkshire Hathaway, as of the 2017 letter, owns 400 million shares of stock at a cost of $1.299 billion. Each share pays out $1.48 a year. Berkshire Hathaway gets $592 million from Coca Cola every single year.

That’s an annual yield of 45.6%.

When we look at the 2019 letter, we see that he now gets $640 million in dividends each year (he hasn’t acquired any more shares of KO). His annual yield on this investment was 49.26% in 2019.

How is this possible!? What is this sorcery!?

Time is an investor’s best friend.

Buffett acquired shares of Coca-Cola in 1988. Back then he wrote “We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.” (1998 letter)

The formula is simple. He bought the shares a long time ago, his cost basis was much lower than the market value, and KO kept increasing dividends. If you buy shares today of KO (at $48.67), you get 3.37% yield. Warren Buffett is getting close to 50%!

I wanted to replicate his success. I wanted to build a portfolio of blue-chip, dividend stocks that would produce passive income for us.

I’ll start with explaining where dividends fit in our existing portfolio, follow it up with a discussion of why we invest in individuals stocks and not dividend funds, a brief chat about the factors in our favor followed by the strategy I use to pick stocks. Let’s go!

My approach is ever-evolving – I will update it periodically as I update my approach. To succeed in anything, especially as an investor, you have to be constantly learning, refining, and improving your process. What you’re reading is what I do today but that might change in a few months or years, check back periodically for changes.

Table of Contents
  1. Where Dividends Fit in Financial Picture
  2. Why Individual Stocks?
  3. A Few Factors in My Favor…
  4. How I Built My Dividend Portfolio
  5. The Importance of Dividend Growth

Where Dividends Fit in Financial Picture

Before we get into how I built my dividend portfolio, it’s important to know how it all fits.

70% of our stock market investments are in various Vanguard funds. The balance is in individual dividend producing stocks. The Vanguard funds also produce dividends, since many stocks in the stock market produce dividends, but I don’t consider those funds part of the “dividend” section of our portfolio. The Vanguard 500 Index Fund Shares has a decent 1.74% yield, so it’s not inconsequential!

My goal with dividends was to create a stream of passive income that would act as insurance against the unpredictability of entrepreneurship.

In 2015, that stream amounted to $55,152.60, a 10.4% increase over 2014. (and what’s nice about this income is that it’s taxed at the 15% long term capital gain rate too!)

It would increase to $57,750 in 2016 and $64,981 in 2017.

Part of the increase is attributed to more investments, part of it was dividend growth. Dividend growth is especially attractive because I don’t have to commit any more money to get greater dividends… you can’t beat that!

Why Individual Stocks?

If low-cost index funds are the best, why not use a low-cost dividend fund from Vanguard? The Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX) has a 1.92% yield with an expense ratio of 0.17% (the Admiral version’s expense ratio is just 0.08%).

It holds many of the same companies that I would end up buying. At the end of Jan2016, 36.6% of the holdings were in Microsoft, J&J, Coca-Cola, P&G, Pepsi, Wal-Mart, IBM, CVS, Medtronic, and 3M… classic dividend producing blue chippers. As of this writing, of that list, I only own Microsoft, Medtronic, and Coca-Cola.

So why didn’t I go with a fund? I wanted to cherry-pick companies that had higher dividend growth rates and higher dividend yield. 2.25% on a dividend fund is meh, especially when the S&P 500 yields 1.74%, right? I wanted more.

I also wanted to have a little fun and scratch that stock picking itch in a way that was safe, smart, and fit our financial plan.

Don’t underestimate the value in responsibly scratching an itch. It’s better than I get to try my hand at picking dividend stocks than the alternatives. 🙂

A Few Factors in My Favor…

To put everything in better context, it’s important to know a few things I saw as my advantages:

  1. I just sold a company and had a sizable sum of investable assets – While this allowed me to grow my dividend portfolio faster, it didn’t give me any special access or advantage other than lower transaction fees on Vanguard.
  2. The great recession just brutalized stocks, I was getting them at a big discount – The bargains will be fewer and farther between now. General Electric was as low as ~$7 in March 2009! With so many bargains, I was able to make some mistakes and not get burned as badly by them.
  3. I have time on my side – I view our assets as a series of buckets. Near-term (needed within the next 5 years), middle term (5-10 years), and long-term (10+). All of this money was long-term money so I could put it in individual companies, with greater volatility, because I could wait out the volatility. Every stock I’ve owned for more than 3 years is positive (not positive in “real” terms, like vs. inflation or the S&P or any other benchmark, but they’re green).

I believe that if you need the money in the next five years, do not put it in the stock market. It’s just too volatile. If you don’t need it for 10+ years, it has to be in the stock market (or some other investment). It cannot be in cash, you give up too much growth.

I also believe that dividends are awesome. You’ve probably heard statistics that say dividends account for a big percentage of gains in the stock market (here’s an article by Bob Pisani about it). I see it as good insurance against income volatility, of which I experience a fair amount as an entrepreneur.

Check out the historical chart for KO, a Dividend King, on Google Finance:

Coca-Cola Co Chart from Google Finance - 1/15/2021

In July 1998, KO hit $43.59 – a high that wouldn’t be revisited until October 2014. Ack!

That would stink if you needed your money because KO’s stock price languished for many many years. But… They kept on paying and increasing that dividend. KO’s stock price may have stunk but KO was doing its job and paying its dividend. That’s pretty awesome.

(Charts like that also make stock market bloodbaths more palatable — as long as the stocks keep doing their jobs!)

How I Built My Dividend Portfolio

My criteria for picking companies has slowly evolved over the years.

It’s not perfect, I don’t think any system ever is, but it has worked for me.

The first filter is that they must be a well-known household brand or be a Dividend King or Dividend Aristocrat. A Dividend King is a company that has increased their dividend for 50+ years, only 18 companies have done that.

A Dividend Aristocrat is a company that has increased its dividends for at least 25 years. (DRiP Investing Resource Center calls them Dividend Champions and organizes them in a very useful Excel spreadsheet) All Dividend Kings are Dividend Aristocrats.

As everyone knows, “past performance is not indicative of future results!” I fully believe that… but I don’t stop my analysis with those lists. They merely pare down the universe of stocks to a more reasonable subset. Also, 25 and 50 years is a long time. 🙂

The next filter is financial and the big number I want to look at has to do with dividend coverage. Dividend coverage is the company’s earnings per share divided by the dividend per share. I want earnings to be at least twice that of the dividend, or a dividend cover of 2 times. I also look at some of the other metrics many use to analyze a company (increases in earnings per share, equity per share growth percentage, etc.). The basic idea here is that I want to make sure they can continue paying the dividend (coverage) and that they can continue to grow the dividend (increasing EPS).

Now I’m confident that the company is financially stable, I check out is dividend growth. It needs to beat 3% each year, which is what I put in my head as average inflation. Inflation is such a fickle number but I’m confident that by having a growth rate greater than 3% means the dividend will grow faster than inflation.

Next, I start doing some searches about these companies on other financial websites I trust. Dividend Growth Investor is a blog I’ve been following for years, he does a good job of analyzing a lot of companies. His commenters are also excellent too and I’ve discovered folks like Passive Income Pursuit through him. I also like Crossing Wall Street, though it doesn’t have a dividend angle, it’s well informed and the Friday market reviews are a must-read.

I read other blogs, not for their analysis per se, but a lot of times they uncover news or tidbits I didn’t see. It’s also fun to read someone else’s approach and see what you can integrate into your own.

Lastly, know when to fold em. I sell when the conditions change. You always need to know when you plan to exit, or you run the risk of making decisions based on emotion. Just recently, ConocoPhillips announced they were slashing their dividend. I sold it because its purpose was to be a dividend stock (and at a certain yield)… and they cut their dividend from $2.96 a share to $1 a share. It’s still a dividend stock, just a lower yield one, but it stopped doing the job I needed.

I am always learning and this system is always evolving, so let me know what you think about it in the comments below. I’m always looking to discuss my approach!

If you’re thinking about investing in dividends and hoping to build a monthly cash flow from dividends, check dividend calendars to see when payouts happen so you can structure them effectively.

The Importance of Dividend Growth

The sneaky non-obvious part about dividend investing is that you can build a safe portfolio that produces ever-increasing cash flows. By selecting companies that grow their dividend faster than inflation, you are building a stream of income that grows upon itself.

You can also achieve this by automatic reinvestment of dividends because this will grow your stake in the company. This is useful if you’re don’t actually need the income. I don’t reinvest dividends because keeping track of those separate purchases can be a bit of a pain. I’d rather just buy more when favorable conditions present themselves.

Looking only at individual dividend stocks, my 2014 yield was 5.623%. If you were to buy the exact same basket of stocks in 2016 (the year of this original calculation), the yield would only be 3.707%. (don’t try to do the math using the $55k dividend income above to reverse engineer our portfolio size, the income number included index funds which aren’t included in this 2014 yield calculation)

By 2018, my yield would only be around 4.58% because I added to the portfolio. But if you bought the same exact basket of stocks, the yield would be only 2.26%. The spread has gotten bigger, since my older holdings, with a much lower cost basis, now have much higher yields.

One of my oldest holdings, and one I haven’t added to, is Verizon. Last year, my yield was 8.6% and more than double what you’d get if you bought the same number of shares today (4.03%).

OK, part of the difference has been the gains in the stock market but the rest has to do with how much you benefit from investing in companies that increase dividends every year. When you find companies that consistently increase their dividend and do so at a rate greater than inflation, your yield is sure to improve.

Dividend growth FTW!

Maybe one day that number will be 40% like the Oracle of Omaha. 🙂

Are you a dividend investor?

What is your process and approach?

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Jim Wang

About Jim Wang

Jim Wang is a thirty-something father of three who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools,, everything I use) is Personal Capital, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a few commercial properties and a farm in Illinois via AcreTrader.

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  1. Angel says

    Hello Jim,
    Congrats on doing what many of us dream to do one day. To tell you the truth, I do not know anything about investing and I just got married 3 years ago but do have goals of improving our financial situation for the future. With that said, my wife and I have been able to save what I would call a substantial amount of money compared to the average savings. I do know that money sitting in the bank is no bueno, and I just wanted to ask, if you had any advice for us as far as how to invest our money, how should we start investing our money. We do not need it in the next 5 to 10 years and by doing some research the stock market sounds like a good option. Do you have any word of advice for us??

  2. Paul says

    Great read. Have you ever attempted to write far out of the money calls on your dividend stocks to generate yet even more income? (Far enough out so you could safely avoid assignment) Love to hear your thoughts on this.

    • Jim Wang says

      I have not but when I looked into it, what I’d earn for those calls seemed so small. And I didn’t want to risk losing the shares, they’re really really nice to have right now. 🙂

  3. Jeff says

    Great read Jim. I’m 52 and just announced my retirement for this year (Sept.) I’ve been trading and investing these markets since 89 or so and am looking to my next phase and have been slowly rebalancing … but it’s painful to take capital gains just to rebalance for more safety. Like you I have a few different accounts. A One Year Account which is all cash, a 2-7 year account which is 40/60 equity to fixed income and an 8+ which will be 60/40 or 65/35. The interesting thing about my situation is that my pre-retirement accounts are twice the balance of my retirement (IRA/401k) accounts. These three accounts I call my “Bridge Fund” to bridge my income for about 18 years (or longer) I’m a little more aggressive on the near side and a little more conservative on the longer end as I don’t expect to touch any of my retirement accounts until I need to do RMDs at 70.5. But even on the 2-7 account, my holdings are very dividend oriented and low risk.

    In any event, I’m trying to do another round of rebalancing on my 8+ account to bring down the stock exposure but waffling on whether to just go low growth div stocks or keep building up my fixed income (VCSH, AGG, etc.). I’m about 10% overweight in equities right now in that account and having a hard time being okay with just more fixed income for an 8+ year account.

    Your thoughts?

    • Jim Wang says

      Hmmm to be honest, this is a little out of my depth and expertise but if I were looking at my own portfolio configured in this way, I’d rebalance to the allocation that fits with your plan regardless of it being more fixed income in your 8+ account. The goal is to make it last, not accumulate as much as you can, and given that we’ve had such a good run, it’s not a bad time to bank that.

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