How I choose dividend stocks for my main portfolio

My main portfolio contains 85% of my investments. It is completely devoted to long term investment in solid high yield dividend stocks. I only invest in stocks that I think I will be able to keep for at least ten years but my goal is always to never sell a stock once I have added it to this portfolio.

This does however not mean that I never sell a stock. I do regular overviews of my portfolio and any stock that does not meet my requirements to be in the portfolio will be sold. I do not keep stock in companies that I do not think have a future. To date I have never been forced to remove any stock from my portfolio and I do believe that I will not be forced to do so in the future either as long as I do my research before I add a stock to my portfolio.

Criteria to be added to the portfolio

A stock needs to fulfill certain criteria to be considered to be added to this portfolio.

  • It needs to pay high yearly dividend. At least 3% although 5% is preferable.
  • It needs to be a well established well ran company.
  • They need to sell a time tested product. (It can not be a fad)
  • They should be relatively recession proof.
  • They need to be growing
  • They need to have a history of high dividends. At least 5 years. I might make exceptions from this rule in certain cases if the company has strong growth.
  • The yearly dividend have to increase from year to year (Disregarding one time payments and spin offs)
  • The company should be associated with low political risk. I.e cigarette companies is vulnerable to new legislation, the same goes for gas companies.

I try to diversify my portfolio by adding stocks in different industries and based in different countries. I do however diversify my investments less than many advisers would recommend. I do this to keep my dividend high and due to the fact that the stocks I chose are relatively low risk to start with.

How to find stock

I always start by looking at a list of the stock with the highest dividend yield on a certain stock market. It easy to find list likes this by googling. It easy to find list of the highest yield stocks on a certain market as well as they highest yield stock overall. Both types of list have their value. List that shows the global dividend kings can give you a good start to find good stocks for your portfolio. Lists with the highest yielding stocks can be very useful when you want to diversify your investment between different markets. By buying stocks in different countries you reduce your risk.

Once I have the list I remove all stock that do not meet my dividend requirements. I then do a deeper analysis of the remaining stock.

Evaluating the stock

When I evaluate the stocks I am not looking to find a stock to my portfolio. My goal is the opposite. I try to eliminate all stocks and discover that they are not suitable for my portfolio. I only want the very best stocks in my portfolio. I therefore want to eliminate any stock that is not worthy to be in it. I rather buy more stock in the companies I already have in the portfolio than adding a company that is not good enough to be in the portfolio.

The first thing I do is to look at the key figures. Does everything look good or are there any red flags. Is the profit growing. How is the profit margins. Increased total profits with lower profit margins can be an early warning sign that the company will have a harder time in the future. I am looking at all data points I can find.

I always avoid companies that have shrinking profits but growing dividends. This is a sure sign of a company that has run out of ideas about how to grow. A company that will die a slow death and can bring you down with it.

Does the company have a good history of increased dividends?

After that I look at the CEO, board and largest shareholders. Is that CEO and board well established within the company or have the recently been replaced. If the company has a new CEO then I try to research the work he has done previous to becoming CEO of the company in question. I always make sure that there are no new large stakeholders. If there are then I look at what type of owner they are. If it is a passive owner that will allow the company to continue business as usually or if it is one that is likely to try to force changes to improve short terms results.

When I know that the company itself is healthy and well managed then I look at the industry they are in and the products they sell. Are they too dependent on one product (common in pharmaceutical companies) or do they sell products that might face legal restrictions. I only invest in companies that have a good mix of products and that introduce new products that will keep them on top.

If a company contain all the quality to be added to my portfolio then I start buying stocks in it. I do not worry about buying at the right time since I am a long term owner. The exact price is less important than that I am able to add the stock to my portfolio. If the stock price goes down a lot then that is a chance to buy more stock.

My main portfolio currently contains the following stocks

The profits in the table below does not contain the dividend I have earned from the stock. The dividend yield can in some cases be higher than the appreciation in value.

Symbol Name Purchase price Last Trade Price Change Change (%)
35.00
30.00
122.00
63.00
45.00
81.00
26.00
89.00
82.00
65.00
78.00

Why I trade CFD:S

CFD certificates are a type of financial instruments that allow you to trade stocks and other assets with large leverage. Many brokers allow you to trade with x250 to x 500 leverage. This allows you to make very large profits on small fluctuations in the market value of stocks and other assets. CFD certificates are a day traders best friend since they allow you to make large profits, large enough to live on, despite not being fabulous wealthy. It allows the trader to make the same profits at someone with a lot larger portfolio that invest directly in the assets.

CFD certificates are extremely high risk investments. You loses are not limited to the amount you invested. You can lose more than you invested. You can even lose more money then you have in your brokerage account. If you lose more money than you have in your account than you need to deposit more money into your account to cancel your debt to the broker.

Lets start by looking a little bit closer at how much money you can make and how much you can loose.

How much can you earn

There is no limit to how much money you can earn when you are trading with CFD certificates. The more the underlying financial instrument appreciates in value the more money you will earn. Lets assume that you have invested USD 1000 in a CFD with x250 leverage.

  • If the assets appreciates by 0.5% then you earn a 125% return on your investment.
  • If the assets appreciates by 1% then you earn a 250% return on your investment.
  • If the assets appreciates by 2 % then you earn a 500% return on your investment.
  • If the assets appreciates by 5% then you earn a 1250% return on your investment.
  • If the assets appreciates by 10% then you earn a 2500% return on your investment.

CFD certificates will, as you can see in the examples, allow you to make large profits on normal daily fluctuations in the value of a stock or other asset.

A skilled trader can earn very large sums of money very quickly while trading with CFD certificates.

How much can you lose

You loses are not limited to your investment or to how much money you have in your account but they are not unlimited either. Your loses are limited by the fact that the asset price can not sink below 0. Your loses are therefore limited to your investment multiplied by the leverage. If you invested USD 1000 in a CFD with x250 leverage then you can lose up to USD250 000. Once you have lost 250 000 then the asset is worthless and the value can not sink any lower.

You can limited your potential loses by using a stop loss that automatically closes your CFD position if you lose a certain amount. Please note that stop losses are a great tool that I recommend whenever you trade with CFD certificates. They are however not a fool prof way to limit your loses to a certain level . You can still lose more in the event of a flash crash where you position cant be closed at the desired level.

You can also use binary options to hedge your CFD positions.

Broker support

Most CFD brokers will work very hard to give the traders the tools they need to be able to be successful traders. CFD brokers earn more money the more successful you become. A successful trade will make more trades and is more likely to hold positions over night (and pay the overnight fee). All this make successful traders a lot more profitable for the brokers.

Brokers do despite common misconceptions not make any money when you lose money. All CFD:s are hedged on the open market and the broker makes money from the spread and the overnight fee. Not from your loses.

Bottom line

CFD certificates allows me to keep the bulk on my net worth in my low risk main portfolio. Thanks to CFD:s I can keep 85% of my money invested in dividend stocks. I do not have to worry about the daily stock price of these stocks and I know that I will be able to keep them for years. Thanks to CFDs (and to a lesser extent binary options) I am able to use a mere 5% of my total investments in working capital that allows me to make a decent side income. Enough to to pay my mortgage and to contribute to my main portfolio each month.

I often get asked why I do not invest more money in CFD:s if I really make good returns from them. The answer to this is very easy. Yes I might a good return on my CFD positions but they remain high risk investments and I do not want to risk my financial future to greed. Greed goes before fall. I rather take my time and know that I will reach my goal then risk it all to get there sooner. Slow and steady wins the raise.

Why I trade with binary options

Binary options are often referred to as scams. As financial instruments that has more in common with casino games than they do with stocks and other investments. Many will tell you that it is impossible to earn any money from binary options and that they are designed to make sure that you always lose money. That no one who knows better would ever trade with them. Me myself recommend that people avoid them. Despite all this I trade with them regularly. In this post I am going to explain why this is. Why I trade with a financial instrument with an awful reputation. A financial instrument that I discourage others from trading with. You can read more about my investment strategies here and my investment goals, here.

The bad reputation

Lets starts by looking at why binary options have a poor reputation, why they are often referred to as scams.

Poor knowledge

People have a lot of misconceptions about binary options and a lot of traders start trading without really understanding the answer to the question “how do binary options work?“. All information about how binary options work are freely available on numerous websites. Most brokers provide detailed information about how the options work. It is very easy to learn how binary options work if you want to do so. A lot of traders are unfortunately too lazy to read the information provided and just assume that they understand how everything works. They assume that binary options work the same way as regular options. This is not the case.

Traders start trading with these options without understanding how to use them effectively. Without understanding that you need to be a skilled trader to make money. Unskilled traders will lose money and all new traders should always use their demo account to train until they become skilled traders. Binary options brokers make their money from the large quantity of unskilled traders that starts trading with real money before they are ready. Traders who in their hubris thinks that they are skilled enough to make money without ever taking the time to learn if they really are.

Misleading advertising

Binary options have been advertised very aggressively and it is very common that the advertisement make it seem easier than it actually is to earn money from binary options. The ads make it seems like anyone can start trading with binary options and earn large profits. This is technically true, anyone can make money if luck is on their side, but it disregards that fact that most unskilled traders will lose money. You need to be skilled to be able to make money from binary options. Most people who see the ads and think that binary options are going to make them rich will lose a lot of money.

Binary options might not be a scam but it is fair to say that a lot of the ads are dishonest.

The adds make people think that it easier to make money than it is.

Passing the blame

Traders who have been too lazy to do their research or that has fallen for the misleading ads that make it seems easier to make money than it really is will often feel scammed. Claim that binary options are a scam. It is easier to pass the blame on to someone else than to admit that they where too lazy to learn how the options really works. Too stupid to remains skeptic to the ads and find out the truth before they started trading with binary options. All the information they need to make an informed decision is freely available and easily accessible through google or on the brokers website.

Impossible to make money

It is not true that it is impossible to make money from binary options. A lot of people are making good money from binary options and me myself make modest profits from the trade each month. I would be able to earn more if I was able to devote more time to the trade. If I was willing to devote the time necessary to become a truly skilled trader.

It is true that each option is design to make the broker money. You lose all your money if your option matures outside the money but you earn a lot less (70-90%) when an option matures in the money. The broker has an edge on each option. If you were forced to buy random options than it would be impossible to earn money. But you are not forced to buy random options. You are allowed to pick and buy exactly the options you want to buy. This gives you the edge to earn money. If you are skilled at picking options that matures in the money then you will earn money.

Why I trade with them

The simple answer to this questions is that they allow me to make money. They allow me to get a good return on invested capital with minimal effort.

The more complex answer is that binary options can be used to hedge other investment such as FOREX or CFD positions. This allow me to reduce the risk of certain high risk trades. In some cases I am able to completely eliminate the downside of certain positions. I am hoping to address this topic in a more in depth post at a later date.