Dividend investing is a centuries-long strategy used by many investors to this day. It allows for a regular passive income and accumulated wealth over a more extended period. Dividend stocks should be a part of most trading portfolios, but how many of these stocks should you own?
There is no limit to the number of dividend stocks that you should own. You should invest in as many of them as you can afford and ideally have over 10 in your portfolio for diversification purposes. However, if you are good at analyzing businesses, you can get away with owning fewer stocks.
In this article, I will show you the two approaches to creating a dividend portfolio. You will also learn the best strategies for dividend investing and how you can build your dividend portfolio.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
The Two Main Approaches When Deciding the Size of a Portfolio
There are two ways to approach building your portfolio. These approaches are for general investing but also apply to dividend stocks. Let’s talk more about these.
1. The “Warren Buffet” Approach
One of the world’s richest and most famous investors, Warren Buffet, is a huge advocate for selecting a few companies to invest in based on their financials and intrinsic value analysis. He is against diversification, as he believes that it is a “protection against ignorance” and that investors who know what they’re doing don’t need to invest in 40 or 50 different companies..
2. The Diversification Approach
Most fund managers and institutional investors take the opposite approach.
They believe that owning dozens, if not hundreds of different companies, is a great way to minimize risk through diversification. They invest in companies from various sectors to avoid depending on a few specific companies or industries.
Both approaches make sense and can lead to success, so it is a matter of finding the right balance that works for you and your individual investment goals.
How Diversified Should Your Portfolio Be?
Your portfolio shouldn’t be too diversified. When choosing your dividend investing approach, it is best to combine both the Warren Buffet and diversification approach.
Sure, diversification is great and can help you with risk management if you are new to investing. However, you still might want to analyze the companies you’re investing in. This process can become difficult if you have dozens of different companies in your portfolio.
How To Select Dividend-Paying Companies To Invest In?
If you are a long-term investor, which is recommended for dividend stocks, you can follow this 2-step process when selecting companies to invest in.
1. Look at the Different Sectors
Find a handful of sectors that you like and think can stand the test of time. An excellent way to do this is to first eliminate the sectors you don’t want to be a part of. The sectors you choose should be ones that will stay relevant and in demand for the foreseeable future.
2. Look at the Long-Term Ownership Benefits
After selecting the sectors you want to invest in, it is time to find companies within those sectors that you would like to own for the next 20-30 years. There are many resources online that you can use to analyze the state of these businesses, but it is always best if you research these companies first.
At the end of this process, you should have a few companies from 4-5 different sectors that you can add to your dividend portfolio. You are now both diversified and secure in knowing the value of the companies that you own.
You can follow this video by David Quan for more information on this topic:
What Percent of Your Portfolio Should Be in Dividend Stocks?
You shouldn’t aim to have a specific percentage of dividend stocks in your portfolio. Instead, you should determine your goals and risk tolerance and invest in stocks that are in line with those factors.
Dividend stocks are generally safe investments that take time to compound into any significant growth. You should keep this in mind when determining what portion of your portfolio will be in dividend stocks.
If you want to make significant profits in the short-term (1-5 years) and are ready to take on the risk that comes with that, you are better off focusing the majority of your portfolio on growth stocks or even riskier investments like leveraged ETFs, crypto, and others.
On the other hand, dividend stocks can take up a more significant percentage of your portfolio if you have long-term investment goals and are willing to sacrifice time for a less risky investment.
How To Build a Growing Dividend Portfolio?
The first thing to understand when starting to build a dividend portfolio is that it takes time. Dividend investing is a long-term game that requires patience and knowledge of the companies you are invested in.
With that out of the way, let’s look at a few things to have in mind when building your dividend portfolio.
Industry Diversification
I talked about finding a few future-proof sectors that you like because diversifying the industries you’re invested in is an important part of a winning strategy. That way, even when some sectors in your portfolio are struggling, others may thrive.
If you are invested in a single industry, and that industry experiences a downfall in the market that causes companies to lower their dividends, your portfolio will suffer significantly.
Financial Stability Over Growth
Growth is always good and is the main reason why many people invest in the first place. With that said, the financial stability of the companies you own is much more critical when it comes to dividends.
A company is considered financially stable when it is protected against negative outside influences. The risk of bankruptcy is minimal, and the company uses its funds efficiently.
You can measure a company’s financial stability based on its credit rating, which can range from A++ to D, and you should be looking for as many as possible. You can create a Bloomberg account to check credit ratings on their website.
Invest in Companies That Consistently Raise Their Dividends
Among the dividend-paying companies, some are called Dividend Aristocrats, which are companies that have raised their dividend yield in each of the past 25 years.
The consistent increase of dividends is a good indicator of a healthy business that is increasing its profits year after year. Dividend aristocrats should be a major focus for you when determining
the companies you will invest in.
Reinvest the Dividends
To experience the full benefits of dividend investing, it’s best to reinvest the dividends back into the company and acquire more shares. The more shares you own, the more dividends you will receive.
Over a more extended period, as you keep reinvesting the dividends, your long-term profits will supercharge thanks to the power of compounding.
Additionally, most brokers don’t charge transaction fees for reinvestments, so reinvesting will be cheaper. You can also set up automatic reinvesting with your broker so that you don’t have to make the transaction manually each time you receive dividends.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Having dividend stocks in your portfolio is an excellent way to make your money work for you.
There are two approaches to choosing how many dividend stocks you want to own. You can either invest in a handful of companies or have a broad range of companies in many sectors.
A good strategy for dividend investing is to choose 4-5 sectors with long-term potential and invest in companies within that sector. To achieve maximum growth, you should invest in financially stable companies and reinvest the dividends you earn.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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