The good part of owning so many companies is that I can still monitor these positions regularly. I am reminded I own these companies anytime I receive an annual report in the mail. I also monitor the conditions of companies I have sold previously. That way, I am able to keep up with and learn about business ,which should hopefully pay dividends for a long period of time. Although I do not have the time to read 500 pages/day like Warren Buffett, I try to find the time to search for knowledge on a daily basis. I have quite a few “starter” positions in companies that were attractive at some point, but later on were not or there were better values out there. I do monitor them however, and could add to them if I saw the right opportunity. For example, in 2013 I added to Family Dollar (FDO) and Yum Brands (YUM), when there were weaknesses in the stocks, which were not warranted.
I believe that investors should follow as many companies as possible, in order to learn as much as they can about business. Even if you only own 20 companies in your portfolio, if all you do is keep up with those 20, you might be doing yourself a disservice.
Overall, I do realize I have too many companies in my portfolio. However, I am never going to let this stop me from looking for new opportunities. For example, I like General Mills (GIS) stock at current levels. I find it a much better value than competitors than existing peers I already hold in my portfolio. I recently initiated a position in the stock. I could theoretically buy shares in PepsiCo (PEP) or Nestle (NSRGY) or Kellogg (K) instead, in order to keep the number of positions in my portfolio static. From a capital allocation point however, it seems pretty dumb not to focus on the best value you find when you have new money to put to work.
I find that investors who focus on absolute number of stocks in a portfolio, miss this important nugget of gold. There is no limit to the amount of companies in your dividend portfolio. It should only be limited by the number of good ideas you have. You should also build your portfolio slowly, one position at a time, and several buys per each position. The worst piece of advise I hear is from those who paraphrase Warren Buffett and his supposedly concentrated approach. The saying goes that your 25th idea is not as good as your first idea.
I have news for you – you are not Warren Buffett. I am highly skeptical that investors know in advance which ideas are their best ideas. From my experience, my best ideas were way past portfolio components number 25 or 30. At the time of purchase, you do not know which company will keep raising dividends, and which would cut them and burn to the ground. With income investing, you are dealing with a lot of bits and pieces of imperfect information, which is why it is impossible to know which company will perform great. In addition, while Warren Buffett was not very diversified during the days of the Buffett Partnership, he has diversified extensively since the early 1970s. I have read his annual reports, and he has never once said that Berkshire Hathaway (BRK.A, BRK.B)has too many subsidiaries or stock holdings.
I do not believe that holding so many stocks is probably not perfect if I wanted to outperform all other investors. You can see that despite the large number of holdings, the top 30 positions account for almost 80% of the portfolio. The top 40 positions account for 90% of the portfolio. Some of the remaining ideas have the chance to grow if they became attractively valued. For example, Peter Lynch from the Fidelity Magellan Fund managed an outstanding performance over a 13 year period, while holding hundreds of individual stocks in his portfolio. This did not hurt his performance at all. While I am not a super investor, I believe that the notion of finding a good idea and testing it with real money, before adding a significant amount of change to it has some merits.
I believe the real reason behind my comfort level with so many individual holdings, is because of my intense focus on reducing risk. I believe that you only need to get rich once in life. I would hate to spend years of my adult life accumulating a nest egg, only to lose it due to a few concentrated stupid investments. I would much rather end up with $1 million but with lower risk, than shoot for the stars and end up with somewhere between $10 million or zero dollars. If all I need to be retired is the $1 million, then why shoot for the stars and potentially risk it all?
Full Disclosure: Long everything mentioned above except for NNN, UHT, VZ and CINF