How to earn passive income by building a dividend portfolio?

How to earn passive income by building a dividend portfolio?

How to earn passive income by building a dividend portfolio?

  • Lisa Osada and Ben Offenberger are financial bloggers and investors with six-figure portfolios.
  • They both made thousands in dividends last month.
  • They spoke to Insider about how they analyze companies and what stocks are in their portfolios.

This is an edited, translated version of an article originally published on June 6, 2022.

Dividends are an easy way for investors to generate passive income. Two German financial bloggers and investors, Lisa Osada, who runs Aktiengram (Sharesgram), and Ben Offenberger, who runs Beamteninvestor (ExecutiveInvestor), are targeting dividend stocks.

Both have built six-figure portfolios. In May, Osada earned about $3,000 in pre-tax dividends, or about $3,200, while Offenberger earned just under $1,800, or about $2,000. On average, Osada earns about 400 euros per month in dividends and Offenberger about 1,300 euros. Insider has verified these amounts with documentation.

Insider spoke to investors about how they built their dividend portfolios and their advice for others who want to do the same.

“My main tip sounds illogical at first, but it’s hugely important: When building your dividend portfolio, don’t pay attention to the dividend,” said Offenberger, 38, adding, “It should always be about the companies themselves.”

He said investors should ask themselves: What does the business model look like? Is the company able to steadily increase its profits? And does it have what’s called an economic moat, a term made famous by Warren Buffett — meaning the company has an advantage over its competitors that it can maintain and establish its market share?

“After all that, you can start looking at the dividend,” Offenberger said.

Osada said the quality of the company is “always” the most decisive factor. Before investing, she said, she looks closely at how the company makes money and tries to get an idea of ​​how it will develop.

Both investors said they do this analysis on a company before looking at dividend ratios.

Osada and Offenberger said they pay attention to the average historical

dividend yield

and whether the dividends are paid through earnings or through cash flow.

“I make sure that the ratio is not above 75% on average, but also not below 25%,” Osada said, adding that if all of the company’s profits are paid out as dividends and nothing can be reinvested, then no is a good sign.

She also mentioned dividend continuity, or how many years in a row the dividend has been reliably paid and not reduced.

They both said they also look at the average dividend growth rate, which is the rate by which a dividend increases each year.

Offenberger received dividends from nearly 20 companies in May. He mainly focuses on US equities; AT&T, Mastercard, British American Tobacco, Hercules Capital and Omega Healthcare Investors are all in his portfolio.

In May, Osada received dividends from, among others, the German chemical companies BASF and Symrise, the energy company RWE, the insurance company Munich Re, Apple, The Cheesecake Factory, BMW and Mercedes-Benz.

Mercedes-Benz paid her the most dividend, just over 1,777 euros, while BMW paid her 348 euros.

“It is important to mention that I have built Mercedes’ position over many years,” Osada said. She first bought shares in the company in April 2013 and invested about 800 euros, continuing to expand her position.

“Recently, during the COVID-19 crash, I bought a large amount when the price was around 25 euros,” she said.

Offenberger said it’s critical to diversify your portfolio, adding that “this involves covering different sectors as well as mixing stocks with dividend growth and companies with higher dividend yields.”

Osada agreed, saying you should avoid investing all your capital in just a few stocks or one sector or focus on just one dividend metric in a stock.

“The classic is to buy a stock just because it has a high dividend yield,” Offenberger said. But often it has a high dividend yield because its share price has just fallen sharply, he added. “Here you can wake up brutally if the dividend payment has to be reduced or stopped altogether.”

Osada added that “there are no guarantees with dividends.”

But Offenberger acknowledged that some high-dividend-yielding companies can be worthwhile, citing real estate investment trusts, or REITs, as an example. REITs own and manage real estate, collect rent and then pay out the income as a dividend; they are required by law to pay out at least 90% of their annual taxable income as dividends.

“Looking at profits is also the wrong measure here,” Offenberger said, adding that real estate companies have high depreciation, so profits “don’t make much sense.”

He said you need to look at other numbers, such as funds from operations, that real estate analysts use to determine a company’s profitability.

As an alternative to stocks, Osada recommended ETFs. She said there are broad-based ETFs that cover companies around the world and target quality dividend stocks.

She added that while ETFs mean less effort for you as an investor, because they are passively managed, you can still profit from the profit shares.