The Dividend Investing Strategy : Compounding dividends by 3 levels of diversification consists of combining 3 different types of portfolios;
• High dividend portfolio
• Dividend growth portfolio
• Dividend income portfolio
This dividend investing strategy combines the best of three worlds,reduces risk by diversification and provides significant wealth building results over a longer period of time by compounding dividends.
The high yield dividend portfolio holds high dividend stocks, which have a higher risk level. These types of stocks have a dividend yield of more than 7%. The stocks are mostly business development companies (BDC) and closed end funds.
The dividend growth portfolio consists of stocks which have the lowest dividend yield of the three divided portfolio’s (high yield dividend, income orientated dividends and dividend growth portfolio), however in general the stocks in the dividend growth portfolio raise their dividends by 15% or more per year. This together with the compounding dividends of these type of stocks generates an increasing income and share value appreciation, especially over a long period of time.
Income orientated portfolio is focused on shares of companies which have a reliable income. These are in general conservative companies, which have a record of paying dividends to shareholders even if the economic times are difficult. These include MLP’s and REITS. The re-investment of income from dividends creates the compounding dividends effect over time.
When the generated income of these portfolios is re-invested, a compounding effect is created. It’s preferred to have the dividends paid in shares, instead of cash since this increases the compounding dividends effect. Over a longer time of period the results of the strategy will show off significant wealth building results.