For people with limited time and/or not much knowledge of how to go through the proper process of fundamentally analysing investment opportunities, and who still want to potentially get higher returns than the market with a little added risk, here is a very simple strategy that can be followed.
This method leads to a relatively concentrated portfolio of stocks, which have the potential of outperforming the markets as well as provide a relatively safe environment for the investment. Here are the steps.
- Pick the top 10 stocks with the highest dividend yield from the Dow Jones Industrial Average index.
- Pick the top 10 stocks with the highest dividend yield from the S&P500 index.
- Decide on whether the companies in your final list are aligned with your overall ethical criteria. For example, some people do not want to invest in tobacco companies, while others may have issues with weapons manufacturers, etc.
- You should end up with 15-20 stocks (after taking out duplicate stocks and/or stocks you removed in step 3), where you will invest in each of them equally. So, if you are starting with $10,000 and your list has 20 stocks, you will invest $500 in each.
- You can review the holdings once a year by following the same criteria, and making changes according to changes made in the Dow Jones Industrial Average and the S&P500 indices.
- You can also choose to rebalance the portfolio every year, every 6 months, or every quarter, depending on your preference.
- If you want to grow the portfolio, you can choose to reinvest the dividends received. If you want to generate income, then you can simply withdraw the dividends received.
You can use a free stock screener, such as the one on Finviz, to pick the index, add the dividend yield to the columns, arrange the results by highest dividend yield to lowest, and you’re done!
To add an extra layer of analysis to this method, you can look at dividend payment history of each of the companies on the list, and only invest in those with consistent history of dividend payments.
What makes this strategy relatively safe?
- You know you should be getting paid a decent dividend, even if markets are declining.
- You are picking some of the largest companies in the US, which means that they must be doing something right.
- The diversification of the portfolio means that risk is spread over the different companies and sectors that you’re holding, so you’re not exposed to one single risk factor.
As I mentioned at the start, this is a very simplistic method of picking stocks, which means that if you only follow these steps, you may be investing in companies which could potentially have issues, since you haven’t done the full analysis to find out more.
This makes it a strategy not without its risks, as well as the portfolio being riskier than the market since it has very concentrated positions. But, as is usually the case, the higher the risk, the higher the potential rewards.
As always, I write about some simple strategies to give you food for thought rather than recommend something specific, since my goal is to make you think for yourself. Ultimately, any decisions you make have to be yours and yours only, and you have to be convinced of their merits and understand their implied risks.
I wish you all the best!
(Written by Hassan Afifi)
Please note that we do not provide any financial or investment advice. All the material shown here is for educational purposes only, and we only mention the author’s own personal opinion and approach for such educational purposes. If you would like to invest or trade, we urge you to do your own research and to seek professional advice from qualified investment advisors.