Building a dividend yield portfolio: Business Line,

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From a five-year analysis, we know that a portfolio strategy based on ‘Dogs of CNX-100' has worked quite well in beating the market. But how is a portfolio using this strategy built?

Here are the steps:

1. The first step in the strategy, is to rank stocks in the index (CNX-100, for instance) in terms of dividend yield. Dividend yield is the total dividend received per share in the past year (both interim and final, but excluding special dividends) divided by the stock's current market price.

2. Pick the top ten dividend yielding stocks from the list and invest an equal amount of money in these stocks.

3. Run the screener one year from the time of building the portfolio. Remove stocks that don't figure in the top ten dividend-yields list. Once again, build a portfolio of ten dividend-yielding stocks.

This would involve sale of few stocks which have fallen from the ranks and re-balancing the entire portfolio again, to ensure equal weights for each stock. Repeat these steps every year.

FREQUENCY AND GOOD MIX

Investors can do this exercise in January or any other specific date each year, as long as they stick to portfolio re-balancing every year.

The catch is to find stocks which are out-of-favour/beaten down. These stocks are called dividend dogs because they are beaten down.

Additionally, proponents of this strategy suggest the use of a bit of subjectivity when selecting stocks.

For one, it may be good to have a mix of small-, mid- and large-cap companies.

Two, it is best to review the prospects of the sector one is investing in.

Such moves, even if they mean a bit more active selection, may improve returns of the portfolio.

Three, one also has to evaluate the sustainability of dividends before investing in such a strategy.