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 (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 (MCD) or Wal-Mart (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 (T) much faster than analyzing a stock in the apparel industry such as V.F. Corp (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.
Another positive of analyzing companies with strong competitive advantages is that there are few major developments that happen. I choose to ignore the daily market noise, and try to focus on important things such as acquisitions, dividend announcements and earnings releases. Because of this, once the investor has accumulated a comfortable level of knowledge about a company, it can mostly still be relevant 5 – 10 years from now. It could allow the investor to accumulate a good amount of knowledge on the 100 or so dividend champions or on most of the 300 dividend achievers out there, during the span of their investing career. Remember that a portfolio of 30 individual stocks takes a few years to build. Similarly, your knowledge of the dividend growth stocks of our day will take time to accumulate. As you gain experience, you will be more efficient in analyzing companies from different industries much faster.
My weekly routine includes compiling a list of dividend increases for the week, which I typically post on my site on Mondays. I also screen the market for companies which are attractively priced, given the fact that I still add money to my portfolio every month. In addition, I also try to update my knowledge of companies I have already analyzed thoroughly by compiling a weekly analysis or two. In the meantime, I have set up a portfolio at Yahoo! Finance, which allows me to scan the market for headlines related to the companies I am interested in. Most companies would typically post their annual reports in February or March, which is when they would be sending those documents to me. All of this takes me 10 - 15 hours per week.
Of course, by intimately understanding the investments I am making, I feel in charge of my own retirement destiny. I would much rather spend the time I spend on my investments, than pay 0.5% annually of my net worth to an investment adviser, while I feel clueless about my financial situation. I also enjoy expanding my knowledge on investment related subjects, which is the same reason that you are reading this website.
Full Disclosure: Long MCD and WMT
- Dividend Growth Investing Gets No Respect
- The Future for Dividend Investors
- How to select dividend stocks?
- Dividend Investors – Do not forget about total returns
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