In the past month, I published the list of dividend holdings I own to my subscribers. Many subscribers were amazed at the number of companies I own. I have always mentioned that having at least 30 – 40 individual positions is great for diversification purposes. This ensures that I am not overly reliant on a single company for my dividend income, in case it cuts or suspends distributions.
However, there is the other side of the coin, where owning too many securities is too much. It could mean that too much time is spent
The first reason behind the excessive number of companies in my portfolio is corporate actions. For example, several of the companies I own stock in have tended to split in two separate entities. Examples of that include when legacy Abbott Laboratories divided itself into Abbvie (ABBV) and Abbott Laboratories (ABT) in 2013.
Another example includes when Kraft Foods split into Kraft (KRFT) and Mondelez (MDLZ). Currently, my small position in Vodafone (VOD) will result in yet another addition to my portfolios after it distributes Verizon Wireless (VZ) stock to me in 2014.
The second reason behind the excessive number of companies in my portfolio is valuation. When I identify a quality company at a reasonable price, I tend to start nibbling at it one lot or half lot at a time. Because I have a limited amount of capital relative to the number of investment ideas I have, I might end up making an investment in a new idea once or twice per year.
For example, if it was cost efficient to purchase stock in $1000 increments and I had the ability to put only $12,000/year, I can only make 12 purchases in my portfolios. Therefore, if I had 12 ideas, I might not be able to make another investment in any of those ideas for a whole year. By that time, the stock could have become overvalued or there might be a better value in a whole new enterprise. The company would still be a good long-term hold, which is why selling it would violate common sense. This is why I am considering dividing my monthly contributions into all my ideas, using Sharebuilder. I just need to make sure I can find $2,400 every month, in order to make this exercise cost effective at a $12 monthly fee for 12 trades.
The third reason behind the large number of securities I own is because I have been investing in dividend paying stocks for several years. When I first started investing in dividend stocks, I did not pay any commissions and could only put a small amount of funds to invest. Therefore, I usually put about $100 – $200 per position. Over time, I have increased my lot size from there. Unfortunately, some of those companies stopped being attractively valued, which is why I ended up stuck with them. Since I am now paying commissions to sell those legacy securities, I have calculated I am better off sitting on them. For example, I try to maintain my trade costs below 0.50%. Therefore if I paid a $5 commission to buy or sell stocks, it would not make economic sense to sell a position whose value is less than $1,000. Investment costs can add up pretty quickly, which is why I try to run a tight operation. It also does not make sense to sell stock in a company that is delivering earnings and dividend growth, and its only sin is being overvalued.
Reasons number two and three have contributed to a number of great companies, where I have pretty low position amounts in plenty of companies.
The fourth reason I own so many companies includes some points from reasons two and three. I essentially have managed to find attractively valued stocks at every single point since 2007 – 2008. Unfortunately, the list of attractive candidates for my money has changed over time pretty significantly.
For example, for several years I had companies like Colgate – Palmolive (CL) or Clorox (CLX) or Procter & Gamble (PG) on my shopping list whenever I had cash to put to work. Unfortunately, these companies have been selling at prices that exceeded what I was willing to pay for them in 2013. In addition, since I constantly search for unconventional ideas, I might end up finding better values. This is how I ended up with so much in Phillip Morris (PM) or Kinder Morgan (KMI).
The fifth reason behind this large number of portfolio holdings is some actions I took over the past year. I sold my shares in a position I believed to be overvalued and having poor future, and then divided the money into several ideas.
For example, I also did some selling of a few overvalued REITs such as National Retail Properties (NNN) or Universal Health Realty Income Trust (UHT). I then put the money to work in three new REITs and added to positions in an existing REIT, Realty Income (O). These reits included American Realty Capital (ARCP), Digital Realty Trust (DLR) and Omega Healthcare Investors (OHI).
Another example includes the sale of Cincinnati Financial (CINF), and using the money to buy stock in the five leading Canadian Banks – Toronto Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Royal Bank of Canada (RY) and the Canadian Imperial Bank of Commerce (CM).