Wednesday, June 22, 2011

Is your dividend income riskier than expected?

I try to maintain a conservative portfolio of dividend growth stocks, where I maintain proper asset allocation, position sizing and have exposure to asset classes and markets outside of the US. You could see my portfolio here.

Since my investments are spread out in several brokerages, it makes sense to keep track of them in one place using spreadsheet software. This makes it easy to compare the overall position size of each stock that I own in relation to my total portfolio overall. In an ideal world, In a dividend portfolio consisting of 40 stocks, one would expect to have a 2.50% allocation to each one of them. In reality however, building a dividend portfolio takes time. The companies which might have been great buys in 2008, might not fit in my entry criteria today. Since I only sell after a dividend cut, I hold on to companies which are overvalued today but either keep or increase their distributions. As a result the allocation to these companies decreases over time, since I constantly add new money to the accounts and reinvest dividends selectively.

As a result, of all the 40 or so stocks I own, almost half of them have a below average weight in my total portfolio. These stocks account for 24% of my portfolio value and 18% of my total dividend income. One quarter of all the stocks I own have an allocation of one percent or less in each company. These stocks account for 6% of my portfolio value but only for 4.5% of the income.

This means that almost half of the names in my portfolio account for 76% of the total portfolio value and 82% of the total dividend income I generate per year.

I was particularly worried when I noted that three stocks were responsible for generating 21.50 % of my total dividend income. These three stocks had a total weighting of 12.50% in my portfolio. These are three high yield dividend stocks which so far have rewarded me with generous distributions coupled with decent increases along the way. The companies include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. 10 year dividend growth rate: 10.90% Yield: 6.40% (analysis)

Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. Yield: 6.90%

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. 10 year dividend growth rate: 2.80% Yield: 6.10% (analysis)

As a result of this analysis, I would probably stop adding money to these positions until my dividend income and stock weights decrease to more manageable levels. On a side note, my investments in Kinder Morgan and Enbridge Energy Partners are primarily in the form of i-shares such as KMR and EEQ. As a result I receive distributions in the form of fractional units, which does not trigger a taxable event. If I were to sell those fractional units however, I would be generating a short-term capital gain.

Two stocks which have a lower weight in my portfolio than average include Air Products and Chemicals and Wal-Mart Stores.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. 10 year dividend growth rate: 10% Yield: 2.60% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. 10 year dividend growth rate: 17.80% Yield: 2.80% (analysis)

I would look forward to increase my positions to these stocks more aggressively over the next few months given their strong fundamentals as well.

Full Disclosure: Long all shares listed above

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  1. Any reason why you have your holdings in multiple brokerages? I used to do this - had close to 6 or 7 brokerages and managing these became a nightmare.

    Finally consolidated all of it with one broker.

  2. You rock! APD in particular was a fabulous buy for me based on your recommendation. Last summer you did one of your analysis articles on APD, and I bought shortly thereafter. First at 69, then at around 71. Of course, I am not only happy at the 30 percent capital increase I received, but like you, I don't really care about that, mainly treating a share of a company as a right to receive it's future dividends.
    The recent 18.4% dividend raise made me even happier, I was high all day that day.
    Later I did also buy PX at 97, even though it was slightly overvalued at the time. I get the dual company effect...And PX has had some nice raises over the last decade.
    Cheers my friend,

  3. You could use something like wikinvest to pull all your portfolios/brokerages into 1 page where you can compare their performance and weighting pretty easily.

  4. Is there a way to avoid taxes with dividend stocks? I know a roth ira is one, but if that is maxed out, is there another way?

    If not, what kinds of taxes do you pay on stocks and dividends and when do you pay them (yearly or only when you sale)?

    I just don't want to get killed on taxes and fees because I don't know what I am doing. Thanks!

  5. as far as I am aware there is no way around the taxes if its a cash dividend.

    stock dividends are tax free, but you must claim cash distributions.

    As of now, cash dividends are taxed at 15% so compared to other forms (interest income, st capital gains) dividends are the most efficient form of realized earnings.

  6. Just curious whether you have any other asset classes in your portfolio, i.e. bonds, gold, etc, or do you use dividend growing stocks exclusively as replacements for those other asset classes? I've really be struggling with that question and wanted to get your input. Thanks.


Questions or comments? You can reach out to me at my website address name at gmail dot com.

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