I think a DG investor should have a list of stocks to follow and buy. Ignore all others because if your evaluation of DG stocks includes a long history of dividend and dividend growth, you should be able to come up with a list of 15-25 stocks. Certainly there is other criteria to consider before you buy, like is it value priced but having a larger portion in one sector is not a major concern of mine.
I feel an advantage in that there are only about 2 dozen Cdn stocks I follow and I only buy when I consider them value priced. I'll buy any of the stocks in my list if the price is right and the yield is attractive.
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I currently own 50 DGI stocks in my 401k account in which I have new money coming into the account monthly and I also maintain a watch list of another 30-40 companies that I am considering. I never have any trouble finding a place to put my money to work once it become available for a new purchase.
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From my perusing the blogs, it appears that most investors have the opposite problem of being overconfident in their stock decisions. Most investors just look at the financials and don't really know the businesses. In this environment, diversification is extremely important.
This doesn't mean you should try to become instantly diversified. I have read several investment books that push mutual funds to get instant diversification. Start with a minimum investment amount (I use $1000), then invest periodically in the stocks that are the best value of candidates that are currently below your target weighting. When the percentage of a given stock falls below a given weighting, it is eligible to buy new shares.
This also doesn't mean that you should sell a stock that has risen dramatically. Just let it ride and don't buy any new shares. A stock that goes from 3% to 6% of a portfolio is not a real problem. However, a stock that is 30% of your portfolio (after you had the opportunity to accumulate different stocks) should have its position reduced. My fiance ran into this situation when one of her large stock holdings was acquired by another of her large holdings.
Diversification should be a buy criteria.
Almost every book written about dividends has an example of the power of compounding and re-investing the dividends. Such as:
The Ultimate Dividend Playbook: "The best information I had was their current portfolio, almost all of which consisted of the various corporate descendants of AT&T, the original Mall Bell".
"All she did, it seemed, was reinvest her dividends- quarter after quarter, year after year, decade after decade. When At&T broke up into ...she held on...when AT&T spun out Lucent and US West..., she held on. Their original value (of AT&T) totaled $6,626 .... blossomed ...into more than $1 Million.
All About Dividend Investing: "In 1944 he gave $10,000 to each of his ..sons". Robert also took his dad's suggestion and bought companies that made up the DJIA. but unlike his brother, Michael, he chose to follow his dad's advice about reinvesting his dividends". "By 2003 Robert's initial investment increased in value, ..., but the additional shares he bought by reinvesting the dividends his grew in value to more than $4.1 million".
Of course neither books recommends holding just one stock or just a few, but it's interesting the examples of success all relate to buying and holding a few good stocks, forever.
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For a dividend investor, IMO, the main risk that needs to be mitigated is company specific risk. During the past few meltdowns, there have few safe havens in terms of loss of principal value. Most all equities and preferred issues were brutalized. I generally cap any single company exposure to 10% and any single sector exposure to 20%, as a loose guideline. As long as company fundamentals hold and as long as the dividend payout is maintained and is usually growing, then the valuation will take care of itself over time. Steep drops in price that are not related to fundamentals, IMO are just buying opportunities. In my newly funded IRA, I am using equal weighting for now, while building positions. After the desired breadth of equities is achieved, I'll probably start doubling some of the positions, and over time will re-balance up to the new 2X weighting. The positions will likely be held as long as current market yield and dividend coverage remain favorable. To me, yield against purchase price is a meaningless metric.
Alex
