Wednesday, August 6, 2008

My Dividend Growth Plan - Diversification

In my previous article I started discussing my dividend growth plan in more detail, by focusing on my stock selection criteria. Today I will be focusing on the diversification part of my plan.

Diversification is important, because it generally insures investors up to a certain point that they won’t lose all of their money at the same time. In general it is not a good idea to put all of your eggs in one basket. In terms of diversification, I am trying to own anywhere from 30 to 100 dividend paying stocks, which generate an ever increasing dividend income stream for me. The stocks should fit the criteria which I mentioned in the previous articles that I wrote. I will be trying to get a representative sample of as many sectors as possible; I will however try to own dividend stocks which are representative for the ten sectors that comprise the S&P 500 index. These sectors include Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecom and Utilities. Financials, Telecom and Utilities are stocks which traditionally have paid solid dividends. I will try to not be overly concentrated on specific sectors and instead try to be as equally weighted sector wise as possible.
Another important sector to look into is real-estate. Luckily there are plenty of REIT’s out there to satisfy the dividend investor’s appetite. I am also looking into getting some timber exposure, by purchasing shares in timber REIT’s like PCL, RYN, and POPE.

My portfolio will not be diversified without adding some foreign stock exposure. At this time this has been my weak point. It is difficult to find foreign companies which have increased their dividends consistently for more than 10 years. In addition, not all foreign dividend achievers are readily available to buy in the US. There are other taxation issues, which could potentially turn foreign stock investment into a complicated matter.

Another matter to look into is that most dividend paying stocks are established large cap corporations. Thus further diversifying into small and mid caps will be a tougher challenge.

Last but not least, a 20-25% exposure to fixed income could smooth the equity curve of my portfolio and reduce volatility. I wouldn’t start contributing to fixed income until I have ten years to retirement however. Even a modest exposure to bonds would have been helpful if you were invested in US stocks at the onset of the Great Depression or in Japanese stocks at the end of the 1980’s.

Next Week, I will discuss the last part of my dividend growth plan - Money Management.

Relevant Articles:

- Determining Withdrawal Rates Using Historical Data
- Diversification Matters
- Diversification and portfolio allocation
- Can money grow on trees?

3 comments:

  1. A suggestion for an international dividend stock is Diageo (DEO-N), headquartered in UK. It's a leading premium drinks business with international brands - Guiness, Johnny Walker, Smirnoff.

    Cheers,
    Debra

    ReplyDelete
  2. Deb,

    Thank you very much for your suggestion. It does seem like DEO has been increasing their dividends ever since 1999.

    2007 Total 2.605
    2006 Total 2.289
    2005 Total 2.203
    2004 Total 2.02
    2003 Total 1.694
    2002 Total 1.6
    2001 Total 1.445
    2000 Total 1.4
    1999 Total 1.395
    1998 Total 1.569

    IT does seem that there was a special dividend in 1998..
    http://www.diageo.com/en-row/Investors/ShareholderServices/OrdinaryShares/DividendInfo/

    ReplyDelete
  3. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

    Sarah

    http://www.thetreadmillguide.com

    ReplyDelete

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