Building a Dividend Portfolio
How "The Rule of Eight" can help you to build a dividend portfolio -- one stock at a time
As always, please read our disclaimer.
So my Great Uncle Arthur was a dividend investor.
Art mostly bought higher-paying dividend stocks — and just held on to them.
Arthur had a kind of interesting philosophy though in how he built his portfolio called “The Rule of Eight.”
And Art’s “Rule of Eight” was pretty simple: select a portfolio of eight stocks, and hold on to them for a predetermined period — like six months or a year. And then, re-evaluate. Toss the stinkers (the ones which lost a lot of money) and replace them with something else.
Then, as time goes by, take any winnings (dividends and/or capital gains) and start another pool of eight stocks.
So sometimes the capital gains (when averaged out across all eight stocks) might not end up being that much in a typical year — but sometimes it is a lot.
And then, when you add in dividends of 5-10% or something over a year — that gives you a capital pool of dividends to play with.
It’s a bit like what Warren Buffet did with Coca-Cola. Each year he receives $776 million in dividends.
If you were going to buy 400 million shares of Coca-Cola today (Berkshire Hathaway’s current stake) it would cost you a cool $25 billion.
As an average investor, you can’t afford to do that.
But even with a smaller portfolio, the same underlying principle applies: use dividends (and some capital gains) to diversify.
What I mean is, I’m sure Warren Buffet does some pretty interesting stuff with that $776 million every year. Like buy new companies (GEICO, Dairy Queen, Duracell, Benjamin Moore & Co., and Pilot Flying J.) or start a new company (Berkshire Hathaway HomeServices).
As a small investor, you can only buy shares of companies—but again, same general idea. Use dividends to power your portfolio.
So if you combine periodic dividends and some capital gains capture in order to diversify, that means that you can create additional “pools of eight” of dividend-bearing stocks for your portfolio over time.
Over the long run, this means you can build a portfolio of quite a few dividend stocks — all paid for largely by dividends. Which means they are, essentially, free. And then those dividend stocks also produce dividends.
So Art’s system is a bit like being at the top of a mountain — and setting eight little snowballs rolling downhill. It might not look like much right away, but far downhill, kind of looks like an avalanche to me.
