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Tracking the “Potential Yield” of Your Stock Portfolio Instead of Only Your Actual Average Dividend Yield

I went to Instagram and saw a dividend income tracking post that triggered me enough to put out this post.

So, I decided to introduce you to this Potential Yield concept that my close investing friend and I used to have our eyes on during my dividend investing days.

You might find this useful.

Investing in dividend companies got a bad name recently due to the low returns because most stick with stocks in the Asia market due to the lower dividend withholding taxes, and generally, the market hasn’t been performing well.

Secondly, because some of your goals is not to spend down your capital when you are financially independent, and would only want to spend income, you will tend to look for companies that give a higher than average dividend yield (3-4% yearly or more).

You are open to invest in stocks that pay a lower dividend but greater potential growth in dividend annually but that eventual goal to have enough income for financial independence stick out like a sore thumb.

Those goal-driven and conscientious trackers of dividend income would have a goal of say $40,000 a year in dividend income as a target in mind because that is close to their income need, and perhaps with some buffer.

They will also track what is the dividend + interest income they get for the calendar year.

What I suggest is to track the potential yield of your portfolio.

Suppose for the past 8 years your portfolio looks like this:

We can convert this portfolio value to income.

At the end of the accumulation period, you might want to shift your portfolio into a certain kind of characteristics:

  1. Average current dividend yield of around: 3-4%
  2. Dividend growth to be around: 10% p.a. (higher chance to keep up with inflation)
  3. 50% in the matured stage 50% still have pretty good dividend growth.
  4. Dividend payout ratio to be lower than 30-35% of free cash flow.
  5. 15-20 stocks.
  6. They should keep up their dividends and if they do not, you would sell and rotate them into something else (this means you need to keep watch of an opportunity set in retirement)

So this means you can work with a retirement income projection of 3%, 3.5%, 4%.

With your portfolio value, you can plot out the following (Ignore the title of the chart, that is wrong. These lines are annual income lines):

For each portfolio value, just multiply by 3%, 3.5%, 4% to get the starting income.

At some point, you may realize you reached the “cross over point” where your income is more than your needs.

Here are the numbers:

There are a few advantages of tracking based on potential yield:

  1. It is easier to record since all you need is to collate your current portfolio value. There is no need to think about the dividends.
  2. Mentally, you don’t have to focus on finding high-dividend companies and can invest in companies that is non-dividend paying.
  3. The three different lines constantly asks you the important question of how tethered to reality is your eventual income plan.

Potential Yield does invite an important question:

How should my eventual portfolio setup be? What is a reasonable starting dividend yield of the portfolio? What kind of companies do I want to own in that scenario?

But if you ask me, you SHOULD be thinking about this regardless if you decide to implement this or not.

You may disagree with my criteria above (because it is based more on a dividend growth perspective), but you ought to think about this.

If you struggle with this, you got bigger problems that whether you agree with this kind of tracking or not.

Of course, sometimes we have fun by thinking:

If I sell off my portfolio today, and I put all my money in Asian Pay Television Trust (APTT), my dividend will be $1.2 mil x 10% = $120,000!!!!

And then you will feel high for 20 seconds before returning to reality.

But looking at Potential Yield really ask you the question what is a good stabilized yield?

I moved off dividend investing because I don’t think there is. This “conservative yield” tends to shift over time and all we have are just imaginary numbers. But perhaps using 2.5%, 3%, 3.5%, 4% as a few lines allow you to visualize things better.

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.


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