I now hold over 40 individual dividend stocks in a material to my portfolio way. Each of those has varying portfolio weights, because some of the companies have been attractively priced early in my accumulation process, but have been overpriced ever since. As a result, I have allocated new funds and dividends generated by my portfolio into the best picks at the time funds were available.
Contrary to popular belief, it does not take a lot of time to keep up with a dividend portfolio consisting of 40 -50 individual issues. This is because as a long-term investor, I purchase shares after doing a large amount of research behind each idea. As a result, I get to update my knowledge through my annual stock analysis of a stock. I gather data by looking at annual and quarterly reports, analysts’ reports and general news. As a long term investor, one notices that there are not a lot of things that materially change from year to year.
For example, Wal-Mart (WMT) has been a retailer for over forty years, and McDonald’s (MCD) has been a fast-food company for many decades as well. It is true that each year these companies are facing different challenges ahead, but at their core they are very much unchanged. This is another reason why investors should spend a lot of time upfront educating themselves how a company generates money.
In addition, I also try to diversify, in order to decrease my reliance on the dividend stream from a few bad apples. In a concentrated portfolio of 10 securities which is equally weighted, a dividend elimination by one of the companies will lead to a 10% decrease in total dividend income. In a portfolio of 40 stocks, if one company eliminated distributions, it would result in only 2.50% decrease in dividend income.
At the end of the day, even if the remaining stocks managed to grow dividends by 11%, my total dividend income would be unchanged. In the second portfolio, if the remaining companies managed to raise distributions by at least 2.50% my total dividend income would be unchanged for the year. Given the fact that historical dividend growth has been around 5% per year, I believe that it is much safer to assume that 10% growth is too optimistic. As a result, I would much rather have my portfolio generate a stream of income coming from many stocks rather than few.
Full disclosure: Long all stocks mentioned above