One of the most important goals that I try to achieve in my dividend growth portfolio include stock quality, valuation and diversification. I have written extensively on diversification before, and why it is an important stepping stone in structuring your dividend portfolio. I believe that even if one has an investing edge through a strategy such as dividend growth investing, investors need to have fail safe mechanisms such as diversifying among at least 30 quality stocks, while paying a reasonable price for them.
Thus, if investors end up purchasing the next Bank of America (NYSE:BAC), the blow to their portfolio and dividend income would not be sizeable enough that they would have to go back to work at an old age.
In each of my articles on diversification however, there are always readers who express concerns about the amount of time it would take to keep current on all events in a 30+ stock portfolio. This is a valid concern, since it could potentially take more effort to act on a news of a dividend cut in a 30 stock portfolio than a 10 stock portfolio.
I do believe however, that the added safety of spreading your risk between 30 or more income stocks is well worth the effort it would take to disseminate new information regarding one of your holdings. So how can dividend investors achieve adequate portfolio diversification, while also having a life?
In my stock picking, I use quantitative and qualitative screening criteria. In general, it takes 15- 20 hours on average to thoroughly analyze a dividend growth stock that fits my entry criteria. This could include reading annual reports, analyst reports, any notable news articles, looking at trends in dividends, earnings, stock prices, sales and familiarizing yourself with the company in general.
In a portfolio of 30 stocks, this translates to several hundred hours of research and analysis. The good part about this is that once an understanding of a company’s business is done, there is typically very little work involved in learning new information about it.
Typically, a company like McDonald’s (NYSE:MCD) or Wal-Mart (NYSE:WMT) is not going to change their business model every year. As a result, an investor who understands the business of each of these corporations today, will likely still have a good understanding of these businesses 10 years from now.
In addition, some investors already have a circle of competence in certain income stocks. This could be due to work they might have already done in researching these companies due to their occupation, through previous interactions or due to their accumulated level of knowledge in general.
As a result, it might take them much less than 15 hours to analyze a stock, given the level of experience they have accumulated. For example, I have experience in the telecom industry, which lets me analyze a company like AT&T (NYSE:T) much faster than analyzing a stock in the apparel industry such as V.F. Corp (NYSE:VFC).
After the initial analysis has been achieved, investors who focus only on the important events surrounding the companies on their list, will not spend too much time on each individual investment. It is important however to spend approximately ten hours each week in researching new candidates for your income portfolio, screening the market for attractive opportunities and looking for important developments in the companies you own. Chances are that there is less than one important development per year per each stock on your list.
In addition, certain events outside of your analysis framework could provide you with additional information. For example, everyone who paid any attention to news in 2007 – 2008 heard about the financial crisis affecting the banks. Thus, any bank stock investor should have known to look after their financial stocks with a more detailed lense.