Creating a Dividend Portfolio for Young Investors

Building a Better Mousetrap
Building a portfolio of stable dividend-paying equities is simple and represents the true heart of investing - buying ownership of a company. By focusing on the strategy when young, investors have more time to let compounding work its magic. 

Famed value investor Benjamin Graham outlined the rules for building a core portfolio of stocks in his book, "The Intelligent Investor" (1949). Two of those rules are incredibly important when it comes to creating a dividend portfolio. Firstly, each stock held should be large, prominent and conservatively financed. Secondly, each company should have a long record of continuous dividend payments. By focusing on these factors, investors can find sustainable dividend payers.

Ratings agency Standard & Poor's does much of the legwork for investors when it comes to these two rules. Each year, the agency publishes its S&P Dividend Aristocrats list, which features firms that have raised their dividends for 25 years or longer. While there are no guarantees that these firms will continue to crank out the dividends - some former members of the list did cut payouts during the Global Credit Crisis - the Aristocrats are as close to a sure thing in the investing world as you can find. The list provides a great starting point for would-be dividend growth investors. 

Using that list as a framework, younger investors should focus their efforts on targeting companies that produce products likely to remain in demand 20 or 30 years from now.This is a crucial point to consider, as building wealth through dividends is a long-term commitment. There have been plenty of firms in the Dow Jones Industrial Average that were standard-bearers for their industries back in the day, only to be passed by technological advances. Choosing businesses that have a transparent growth trajectory will make it easy to see how they'll grow earnings over time. For example, it's easy to see how ExxonMobil will do because it's tied to growing worldwide energy demand. Finally, setting aside a consistent amount of money every month is key to seeing the plan work.