Dividend Risks

While I was updating my portfolio page to reflect the prices as of end of May and also to include the dividend information, I noticed a big risk.

One of the things that is discussed a lot (in the dividend blogs I visit) is portfolio diversification – to make sure that all stocks are almost equal weight in the portfolio. But l have not seen any focus on dividend diversification. Dividend diversification is to make sure that all stocks provide almost equal projected dividend income.

The list below is sorted by the amount of projected annual dividends. 6 stocks (GE, MO, KMP, ARCP, AAPL and HPQ) contribute close to 60% of my total projected annual dividends. This is considerably risky if I expect dividends to be a consistent stream of income because if 1 or 2 stocks from this list cut or eliminate dividends, it will be a big hit to my planned revenue stream.

With ARCP being a pure speculative bet (and also a new investment) and HPQ not completely out of the woods yet with their business transition, there is definitely some risk to their dividends.

Stocks like ARCP and KMP do not have a lot of weight in my portfolio, but looking at them from dividends standpoint gives a whole new perspective due to their high yields. Suddenly, these companies look more critical and risky to my dividend growth journey. So I think it makes sense to look at the portfolio both from stock value standpoint and future annual dividends. 

Course of Action: I need to diversify my future investments accordingly in order to spread out the projected dividends. New investments and investments in lower volume stocks like PG, COP and GIS would help to balance this out.

I plan to review this list once in a while to make sure I am making progress.

Stock Total Quantity Annual Dividends % Annual Div Yield
GE 375 $307.50 19.33% 3.06%
MO 75 $141.00 8.87% 4.52%
KMP 25 $135.25 8.50% 7.11%
ARCP 125 $129.00 8.11% 8.32%
AAPL 10 $124.40 7.82% 1.97%
HPQ 205 $118.90 7.48% 1.73%
PM 25 $91.75 5.77% 4.15%
CVX 20 $81.40 5.12% 3.31%
SCHD 75 $71.48 4.49% 2.51%
F 150 $67.50 4.24% 2.74%
XLK 100 $64.10 4.03% 1.69%
TGT 30 $51.60 3.24% 3.03%
VPU 15 $47.09 2.96% 3.37%
CBRL 15 $45.00 2.83% 2.98%
PG 15 $36.75 2.31% 3.03%
COP 10 $27.60 1.74% 3.45%
VWO 15 $17.58 1.11% 2.78%
GIS 10 $15.50 0.97% 2.82%
AET 10 $8.50 0.53% 1.10%
PSX 5 $7.97 0.50% 1.88%
C 15 $0.60 0.04% 0.08%
CMG 10 $0.00 0.00% 0.00%
GOOGL 1 $0.00 0.00% 0.00%
GOOG 1 $0.00 0.00% 0.00%
Grand Total   $1,590.46 100.00%

2014 May % Dividends

 

DISCLOSURE/DISCLAIMER:

I am long on all the stocks mentioned in my portfolio. Also, though I look at the possibility of ARCP/HPQ cutting dividends, I am NOT in any way suggesting that they are going to do that. I am just analyzing the possibility of what happens if they do.

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6 thoughts on “Dividend Risks

  1. You are very correct in citing a need to diversify more of your portfolio. For stability and peace of mind you may want to reduce your exposure from the 6 stocks that account for most of your dividends to the others in your portfolio or increase to your smaller positions to “water down” the 6 stocks dividend proportion. Thanks for sharing your portfolio update!

    • Yup. I plan to increase the positions in some of the smaller ones and also plan to invest in some new companies. With both these actions, hopefully, the dividend income gets distributed over a period of time.

  2. I don’t have the dividend weight in my normal portfolio sheets but I do keep track of it on my dividend growth spreadsheet. I think it’s more important to look at the actual income diversification rather than the capital diversification, although the majority of my portfolio lies in the 2.5%-3.5% yield range so I don’t have to think too much about it.

    • Yes. That’s exactly I wanted to highlight in the post. For dividend focused investors like us, dividend diversification is as important as the portfolio diversification since all stocks don’t yield the same. If the majority of the portfolio yields in the same range like yours, then it should not be an issue. But it is something that needs to be looked at and fixed if needed.
      Thanks for dropping by and providing your thoughts.

  3. Hi DGJourney,
    That’s an interesting post and some food for thought. I tend to look at portfolio diversification from the perspective of identifying the worst performing sector so I can buy more of it to balance the portfolio upwards.
    I’ve recently added a rule not to add to a position if it’s more than 7.5% of my portfolio.
    I’ll have to think about adding another qualifier regarding dividend diversification.
    They are mutually exclusive goals though so favoring equal dividends would tilt portfolio weight towards low yield stocks.
    Thank you for sharing your journey!

    • You are correct. Both are mutually exclusive and like you said, trying for dividend diversification will not enable to achieve portfolio diversification. But I feel that both need to be monitored closely so that the portfolio or dividends doesn’t get skewed by few stocks. You can never achieve perfect diversification in both aspects, but it is better to be “close to perfect” than totally off.

      Thanks for stopping by and your inputs.

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