As some of you have noticed, my monthly dividend income amounts have steadily increased over the past year. Gone are the days when I would not pay too much attention to my portfolio because it is such a small amount, or not have a solid plan in place for the portfolio for the future.
The dividend portfolio has grown which means it’s been taking more of my time and efforts to keep it balanced. Now that the RRSP and TFSA accounts are both maxed out, I’ve had to take a step back to figure out what to do next. I guess it’s a good problem to have and something I should have expected given our current savings rate.
Even though the dividend stocks are in an RRSP and TFSA, I treat them as having the same strategy. I’d like to start investing in US dividend stocks with my RRSP but that likely won’t happen until our dollar starts to rebound.
Asset Allocation by Sector
One of the nice things about a DIY portfolio is that I’m in control of how the money gets allocated. The downside is that it means having to rebalance occasionally as all of the dividend income gets reinvested each month.
Here is the asset allocation I’m aiming for (by sector):
- Utilities – 16%
- REITs – 15%
- Energy – 12%
- Banks – 16%
- Consumer – 13%
- Index – 28%
The allocations above are a moving target – I’m not there yet but this is what I’m planning to do in the future. You’ll notice a portion of the portfolio is set aside for indexing; this is because I’d like to capture some of the international markets without having to do all the research that goes along with it. Buying an index ETF will keep my costs down (low MER and free to buy) while capturing the returns from the markets aside from Canada.
I wouldn’t consider myself an indexer, and will always own dividend stocks but I think there is value in having both.
Dividend Stock Criteria
I’ve thought about the criteria for dividend stocks going forward and I’ve started to narrow it down to what’s important for my portfolio:
- History of dividends. The company needs to have a solid history of paying dividends, and an added bonus if there’s a history of increasing dividends. The utilities sector does this well and the big banks do too.
- Reasonable payout ratio. Going forward I’ll be looking at a payout ratio of no more than 80%. This is important because if the economy takes a downturn (which it always does) I want to be sure the dividends will still get paid.
- EPS History. Earnings per share is one of the biggest factors when looking at profitability and this is no different. Going forward I’ll be targeting companies that have a solid 10 year history of positive EPS.
- Yield. This one is tricky because it depends on the individual investor. Too high is a red flag and too low doesn’t interest me. In the past I’ve been guilty of chasing yield but in the future I’ll be targeting stocks that have a reasonable and sustainable yield. What does that amount to? It’s tough to say as it depends on the company but I’d estimate between 2.5%-5.5% is where I would like to be.
How Many Stocks to Own?
I’ve debated what the ‘perfect’ number of stocks to own in a portfolio is and see there really is no clear answer. Some investors prefer to diversify and own 60+ individual stocks while others keep it simple with 15-30. I’d probably fall somewhere in the middle and when I ran the criteria that I’ll use to grow the portfolio, I came up with around 35 stocks. Will this change? Possibly, but the nice thing about the portfolio is that it’s constantly moving. Dividends get reinvested, allocations change and the allocations I’m aiming for will always be a moving target.
I feel like at this point anywhere between 30-40 stocks in a dividend portfolio is manageable. Decreasing that amount would mean I’d miss out on the companies I’d want to invest in, while increasing means I’d stray from the search criteria I’ll be using.
What do you think of the asset allocation and number of stocks in my dividend portfolio?