The world is filled with uncertainty now as fears of a recession loom.
Coupled with high inflation and rising interest rates, investors can’t be blamed for feeling worried as share prices head lower.
But there’s one aspect of investing that should still provide warm comfort – dividends.
Dividends represent not just a tangible return on your investment but also act as a stream of passive income to fatten your bank account.
Income-seeking investors are drawn to dividend-paying stocks because they represent reliability and safety during tough times.
If you’re just starting on your investment journey, you may be wondering how you can build up a portfolio of dependable income stocks.
Here are three areas you can look into as you slowly construct your investment portfolio.
Blue-chip dividend payers
A good place to start building your dividend-paying portfolio would be in the comfort of blue-chip companies.
Blue chips are so-named because of their reputation, size, and track record of performance over multiple business cycles.
The Straits Times Index (SGX: ^STI) contains Singapore’s 30 largest companies, all of which pay out a dividend.
The local banks such as DBS Group (SGX: D05) and United Overseas Bank Ltd (SGX: U11) form the pillar of Singapore’s economy.
The former pays an annual dividend of S$1.44 per share while the latter doled out a total dividend of S$1.20 per share last year.
At their respective share prices, DBS provides a yield of 4.5% while UOB’s dividend yield stands at 4.3%.
Or if you prefer to own a business with a natural monopoly, there’s Singapore Exchange Limited (SGX: S68).
The bourse operator is a consistent dividend payer that paid out S$0.32 in dividends for its previous fiscal year, translating to a 3.3% dividend yield.
Reliable REITs
Armed with a strong foundation of blue-chip stocks, you can then consider layering on some REITs.
REITs are bundles of real estate packaged together as tradeable securities and are mandated to pay out 90% of their earnings as distributions to enjoy tax benefits.
Because of this rule, they are classified as income stocks as they pay out a predictable pattern of dividends.
Being a REITs hub, Singapore has a wide variety of REITs to offer, and it can be tough to choose which ones to invest in.
My suggestion is to go with some simple rules – look for REITs that have strong sponsors, a great track record of increasing distributions, and that is active in growing their portfolios.
Some examples of REITs with reputable sponsors include Mapletree Logistics Trust (SGX: M44U), which has a sponsor in investment firm Mapletree Investments Pte Ltd.
The logistics-focused REIT pays out a forward distribution yield of around 5.1%.
Parkway Life REIT (SGX: C2PU) is an example of a REIT that has raised its core distributions every single year since 2008.
And Frasers Logistics & Commercial Trust (SGX: BUOU) has grown its assets under management from S$1.6 billion at its IPO in 2016 to S$7.3 billion as of 31 March 2022.
Dependable stalwarts
A third category to look into is the stalwarts that have been raising their dividends over many decades.
The list consists of well-known US companies that have increased their dividends without fail through different business cycles.
Some examples are 3M (NYSE: MMM), Kimberly-Clark (NYSE: KMB) and fast-food chain McDonald’s (NYSE: MCD).
3M, an industrial company that manufactures the famous Post-It Notes, has paid dividends without fail for more than a century and increased its annual dividend for 64 consecutive years.
Kimberly-Clark has raised its dividend for 50 consecutive years while McDonald’s has upped its dividend without a pause for 45 consecutive years.
Building it up brick by brick
Armed with the knowledge above, you can now start to build up your ideal dividend-paying investment portfolio.
Start with a small allocation first and then gradually build up your capital over time as you gain more confidence in the companies you park your money in.
Think of the process as being akin to building a sturdy wall – constructing it brick by brick in a slow but steady manner.
Get Smart: Patience and persistence are needed
Now that you know how to build your dividend portfolio, it doesn’t seem too tough after all.
You can lay the foundation of your portfolio brick by brick, building it from the ground up.
What you do need, however, are patience and persistence.
Patience to take the time to slowly allocate your savings and bonuses into the stock market, and be persistent to ensure you stay the course and do not deviate from your goal of building a strong dividend portfolio for your retirement.
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited and Frasers Logistics & Commercial Trust.
