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10 Steps To Build An Income Strategy & Find The Best Dividend Stocks

This 10-step guide is designed to help investors develop an effective income investing strategy and find the best dividend stocks for that strategy. It is intended for both beginner and intermediate investors.

The world of dividend investing offers many options, each with its complexities. This guide aims to simplify this process by providing clear information on different types of income-generating investments and how to choose among them. It focuses on key concepts such as evaluating investment performance, understanding the importance of diversification, and the role of asset allocation and asset location.

Readers will learn about the various aspects of dividend investments, including assessing their compatibility with individual financial goals and risk tolerance. The guide will also cover strategies for staying informed about market trends and adapting investment plans accordingly. Overall, this guide offers a straightforward approach to understanding dividend investments and strategies, aiming to provide readers with the knowledge needed to make informed financial decisions.

Step 1: Define Your Investment Goals

Identifying your income goals as a dividend investor is a crucial first step in building a successful portfolio. Your goals should reflect both your cash flow needs and broader life objectives.

Begin by clarifying the ‘why’ behind your dividend investments. Are you aiming for a consistent income stream for retirement, seeking to supplement your current earnings, or saving for specific milestones like buying a home or funding your children’s education? Next, analyze your current financial situation, including your assets, debts, income, and expenses. This assessment will help determine how much you can allocate to dividend investments.

Finally, set specific, measurable, and time-bound goals. Instead of merely stating you want income, specify the amount you need and by when. Break these goals into smaller periodic milestones, creating a roadmap that guides your dividend investment strategy and keeps you on track to financial success.

Step 2: Assess Your Risk Tolerance & Minimum Income Needed

Determining your risk tolerance and minimum income needed as a dividend investor is essential for crafting a dividend investment strategy that aligns with your financial goals. Your risk tolerance is a reflection of your comfort level with market fluctuations. Assess how you react to market downturns and whether you can sleep soundly despite temporary declines in your investment’s value. Simultaneously, consider your time horizon and financial goals. Younger investors with longer timeframes typically have a higher risk tolerance, while those nearing retirement might prefer a more conservative approach.

Calculate your minimum income requirements by analyzing your current expenses and lifestyle. Knowing your essential financial needs ensures that your dividend portfolio can cover your necessities. Determine the average % yield you’ll need to earn from your investment portfolio by dividing your minimum income needed per year by the amount of money you have to invest in securities. It’s often a good idea to add a margin of safety of 1% to your average yield to ensure you maintain the needed income if a company fails to declare a dividend.

Step 3: Determine The Frequency Of Distributions

For a dividend investor, determining the frequency of dividend distributions is crucial due to the variation in payment schedules among companies. While some stocks pay monthly dividends, many follow different timelines, such as quarterly or annually. Understanding these payment schedules is essential for managing cash flow and financial planning. By aligning your investment choices with your income needs and desired payout frequency, you can ensure a steady stream of income that meets your financial goals. This careful consideration allows dividend investors to maintain a reliable income source while taking advantage of various investment opportunities in companies with different distribution schedules, creating a well-balanced and diversified dividend portfolio.

Step 4: Learn About The Difference Between Different Types Of Income Generating Investments

Income-generating investments encompass diverse options that provide investors with regular cash flows. These investments typically fall into several categories:

  1. Dividend Stocks: These are shares of companies that regularly distribute a portion of their profits to shareholders. Dividend stocks offer the potential for capital appreciation along with periodic dividend payments.
  2. Bonds: Bonds are debt securities issued by governments or corporations. When you invest in bonds, you lend money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity.
  3. Real Estate Investment Trusts (REITs): REITs own or finance income-producing real estate in various sectors, such as residential, commercial, or industrial properties. They distribute rental income to shareholders.
  4. Preferred Stocks: Preferred stocks are a hybrid between common stocks and bonds. They offer regular dividend payments and rank higher in the capital structure, providing investors with some safety in dividend payments.
  5. Certificates of Deposit (CDs): CDs are low-risk, interest-bearing deposits banks offer. They come with fixed terms and interest rates, providing predictable income.
    6. Master Limited Partnerships (MLPs): MLPs are typically involved in energy and natural resources businesses. They offer tax advantages and distribute income generated from their operations to investors.
  6. High-Yield Savings Accounts: These accounts, offered by banks, provide a safe way to earn interest income on your savings. While the interest rates are typically lower than other investments, they are FDIC-insured.
  7. Annuities: Annuities are financial products offered by insurance companies. They can provide a regular income stream over a specified period or for life, depending on the type of annuity chosen.
  8. Peer-to-Peer Lending: In this digital age, peer-to-peer lending platforms allow you to lend money to individuals or small businesses in exchange for interest payments.
  9. ETFs and Mutual Funds: Exchange-traded funds (ETFs) and mutual funds focus on income-generating securities, such as dividend stocks or bonds. Investing in these funds provides diversification within the income-generating asset class.

These income-generating investments vary in risk, return potential, and liquidity. Choosing the right mix of these assets depends on your financial goals, risk tolerance, and investment horizon. Diversifying across these options can help build a well-rounded income portfolio. We’ll get to both of these concepts in more depth shortly.

Step 5: Determine Your Asset Allocation

Determining your asset allocation involves carefully assessing your investment time horizon, risk tolerance, and risk capacity. If your time horizon is long, you can allocate a larger portion of your portfolio to higher-risk, potentially higher-return investments like stocks, as you have more time to ride out market volatility. Conversely, a shorter time horizon typically calls for a more conservative approach, favoring bonds and other lower-risk assets to protect your principal. Your risk tolerance or comfort level with market ups and downs also plays a crucial role. If market swings cause significant stress, leaning towards conservative investments can help maintain peace of mind. Lastly, consider your risk capacity, which is your financial ability to withstand losses. This includes evaluating your current financial situation, future income potential, and upcoming financial obligations. Balancing these factors helps create an asset allocation strategy that aligns with your goals, comfort with risk, and financial capacity. Regularly revisiting this allocation is important as your circumstances and market conditions evolve.

Step 6: Diversify

Determining the number of dividend-paying stocks to include in your portfolio for proper diversification depends on factors like risk tolerance, investment goals, portfolio size, and sector exposure. While there’s no one-size-fits-all answer, aiming for a balanced and well-researched portfolio of 15 to 30 dividend stocks is a good starting point for many investors. Remember that diversification is key to managing risk and optimizing your dividend investment strategy.

Step 7: Select The Best Investments

Once you know your asset allocation, it’s time to select the best income-generating investments. The simplest way to do this is to purchase access to one of our model portfolios which lists a certain number of investments to purchase per strategy. Our research team has diligently constructed these model portfolios designed for the investor to contribute equal amounts of money to each security and rebalance annually.

If you prefer constructing your portfolio, a good place to start is our screening tables. Our screening tables allow you to filter and sort dividend stocks based on various criteria such as dividend yield, industry, dividend growth history, and other factors.

Once you find a stock that interests you, check out our quantitative stock analysis reports that grade each company on various factors such as dividend history, payout ratio, and financial health. provides comprehensive data and analysis on individual stocks, so be sure to leverage all we offer. For instance,’s dividend calculator can help you estimate the income you receive from a specific investment based on your investment amount and dividend yield.

If you still want to construct your portfolio but want to choose from a smaller pool of investments, consider accessing our Best Dividend Stocks list, which lists what we believe are the best quality dividend stocks or our screening table of Dividend Aristocrats, which are S&P 500 companies with a history of consistently increasing dividends. These can be reliable choices for income investors.

Also, consider investing in Dividend ETFs, which can offer diversification and reduced risk compared to individual stocks.

Step 8: Asset Location & Tax Efficiency

Determining the right asset location for income-generating investments to maximize tax efficiency involves strategically placing your investments in different accounts based on their tax treatment. Generally, investments that generate high taxable income, like bonds or high-dividend stocks, are best placed in tax-deferred accounts like IRAs or 401(k)s. This approach defers taxes until withdrawal, potentially reducing the tax burden if you’re in a lower tax bracket upon retirement.

Step 9 & 10: Monitor Your Holdings and Rebalance Annually

Monitoring and rebalancing a portfolio of income-generating investments are crucial for aligning with your investment goals and risk tolerance.

Regularly review the performance of each investment against its benchmark and your overall investment objectives, typically on a quarterly or semi-annual basis. Monitor any significant changes in fund management, investment strategy, or performance trends. Rebalancing involves adjusting the weightings of the funds in your portfolio to bring it back to your original asset allocation. This may be necessary when certain investments have overperformed or underperformed, causing a drift from your intended asset mix. Rebalancing can be done by buying or selling portions of your funds to achieve your desired allocation, and it’s typically recommended to do this at least annually or after significant market movements. This process helps manage risk and can improve returns by systematically selling high and buying low.

Be sure to use our watchlist feature to keep track of your investments. Watching a stock will also notify you when a significant event occurs. Keeping informed is crucial to building and monitoring a successful portfolio. offers insights, recommendations, and market has a community of investors and experts who share insights and opinions. Engaging in discussions and reading expert articles can provide valuable perspectives. Continue to use as a resource for staying informed about the income investment landscape. Regularly review your portfolio and adjust as needed to align with your goals.

In conclusion, this guide is a comprehensive resource for anyone navigating the complex terrain of income-generating investments and strategies. It aims to empower novice and seasoned investors with the knowledge to make well-informed decisions aligning with their financial goals. By understanding the nuances of various fund types, assessing risk tolerance, determining a suitable time horizon, and strategically allocating assets, investors can build a robust strategy tailored to their unique needs. Furthermore, the guide underscores the importance of staying abreast of market trends, adapting strategies to changing circumstances, and considering the impact of tax efficiency on investments. With these insights, readers can embark on their investment journey, poised to make choices that meet their financial objectives, reflect their values, and contribute to a sustainable economic future.