My M1 Finance Dividend Income Portfolio

I finally gave M1 Finance a try…so far, I am impressed. I have been looking for a way to easily invest extra cash sitting in my savings account but didn’t want to do it with my current brokers because there is no way to invest a small amount of money easily and cost-efficiently. As it turns out, M1 Finance is a perfect solution that I have been looking for.

Why M1 Finance?

Well, there are a couple of reasons why M1 Finance works well for my situation. There are several things it can do really well:

Link up M1 Finance with my bank account was a breeze. Linking and transferring the money took about a day.
I can start investing a small amount, e.g., I started with $1,000.
I can set up my Investment Pie once, and the platform works to maintain my allocation.
It was easy to set up an automatic investment plan; e.g., I am planning to add $125 a week.
And the best reason…there is no transaction fee.

Dividend Income Portfolio

First, I want to emphasize that this is an auxiliary portfolio that is entirely separate from my main retirement portfolio. This portfolio is meant to be a holding place for cash that I want to earn a little extra income on — so I zeroed in on Dividend Income Strategy. Of course, I understand there is a risk of loss when investing the money instead of saving it, but it’s a risk that I am willing and able to take.

For this portfolio, I have a few requirements I want to hit:

Diversified
Low Expenses
Automatic Investment
Opportunities to Buy Low and Sell High

#1 – Diversified

At first, I thought about investing in just the Dividend Aristocrats using NOBL, but there are a few problems.

It would not be that diversified. Currently, NOBL has 57 holdings, and all are US stocks.
It doesn’t create opportunities to Buy Low and Sell High — I would just be buying more shares.

My goal is to be about 50% US and 50% International and to be mainly in stocks and a little bit in real estate. In the end, I went with four ETFs as follow:

SDY at 35%
VYMI at 35%
REZ at 15%
VNQI at 15%

This portfolio has a projected dividend yield of 3.421% and an expense ratio of 0.32%.

You can see the screenshot below (taken after the first day)

I also ran the portfolio through TD Ameritrade X-Ray Tool, and I am satisfied with the results as far as asset allocation and diversification goes:

Although, it is a little heavy in real estate and a little light in the Health Care and Information Technology sectors.

And here are the Top 10 holdings:

In general, I am satisfied with how well the four ETFs diversified overall.

#2 – Low Expenses

I understand that I am not taking full advantage of the M1 Finance platform by using ETFs and paying 0.32% in expense ratio.

If I were willing to spend the time to pick out individual stocks, I could have a portfolio with zero expense.

However, in this early stage, I didn’t want to spend the time to pick out 20-30 stocks to save 0.32%. In the future, as this portfolio continues to grow, I will consider it. Right now, I am willing to pay the expense ratio for the instant diversification.

Fractional Shares and Dividend

Another reason I am not ready to buy 20-30 stocks yet is that I will be holding a bunch of fractional shares (i.e., less than one full share). I am not exactly sure how dividend payments of less than 1 cent are handled. Do the fractional cents get added up and deposited into my account? Or are all the fractional cents get lost to the Ether?

Also, there is no transaction fee for buying and selling shares on the M1 Finance platform, so that helps make up for the 0.32%.

#3 – Automatic Investment

Another great feature is the ability to set up automatic investments easily. Since my account is already linked with my bank account. It took just a few clicks to set up weekly funding.

For this account, I am automatically adding $125 per week, which will help with the next requirement.

Also, dividend payments will be automatically reinvested as well.

#4 – Opportunities to Buy Low and Sell High

Opportunity #1 – Low Correlation Investments

I purposefully chose 4 ETFs and picked ones that have a low correlation (meaning they don’t always go up and down in lockstep).

As you can see, NOBL is a good choice, but it takes away some of the M1 Finance capabilities. So this is what I did instead:

For US Dividend Stocks, I went with SDY as my core investment.
For International Dividend Stocks, I chose VYMI. As you can see, VYMI does not always go up and down in sync with SDY, which is good for a platform that can rebalance at no charge.
For US Real Estate, I filled it with REZ. I thought about going with my old standby VNQ, but REZ shows a lower correlation with SDY, so I picked it instead.
For International Real Estate, I filled it with VNQI.

I hope that the 4 ETFs do not go up and down in lockstep, allowing me to buy more of the worst-performing ones each time. For example:

In 2014, REZ went up the most, so I would be buying more VNQI and SDY.
In 2015, we continued to do the same.
In 2016, SDY went up the most, so I switched to buying REZ and VNQI
In 2017, VNQI went up the most, so I switched to buying REZ and SDY

You get the idea.

By the way, here is an excellent Asset Correlations Tool by Portfolio Visualizer.

Opportunity #2 – Automatic Investment

As mentioned above, I set up an Automatic Investment Plan that will invest $125 each week. The cool thing about M1 Finance is that it automatically tries to keep the original allocation using new money.

In a traditional platform like a 401(k) plan, when I add $125, the plan will buy $43.75-$43.75-$18.75-$18.75 using my investment allocation of 35%-35%-15%-15%.

On the other hand, M1 Finance will add different amounts to each investment to restore the original allocation like below (example only…not actual numbers):

The main point is that it will buy more of the “least expensive” investments and less of the ones that have risen.

Opportunity #3 – Dividend Reinvestment

Whenever my dividend payments add up to more than $10, the dividends will be reinvested in a similar way as above, i.e., buying more of the worst performers to restore the original allocation.

Bottom Line

I am glad I gave M1 Finance a try since it is hitting all of my requirements for what I need to do. Hopefully, this article gives you a little bit of insight into how to construct an investment portfolio as well.