Building a dividend portfolio doesn’t need to be complex. You probably want to set yourself up for excellent growth while at the same time protecting your investments from severe losses. If that’s the case, then you need to consider two important things as part of your dividend portfolio allocation strategy:
- a well diversified set of dividend growth stocks
- a fail-save mechanism in case an investment turns south
Consistently dollar-cost-averaging in undervalued dividend stocks and reinvesting the dividends will then allow you to reach your early retirement date as planned. The true power is really in the compounding effect.
Calculate your own financial freedom date
So let’s therefore talk about my dividend portfolio allocation strategy today.
It’s not something which I have designed over night and it is the accumulation of reading tons of information and 6 years of dividend growth investing experience.
make sure to first build an emergency fund and pay-off all your high interest debt. I consider those the necessary pre-steps before starting your investment journey.
My dividend portfolio allocation strategy
There exist many well known strategies regarding portfolio allocation. An example of such popular strategy is the bond/stock ratio and it uses your age to calculate your ideal allocation to stocks versus bonds (100 minus your age).
I believe that such a strategy could be really good for you and who am I to challenge it? I’m not an economist who gained a PHD on this topic 😉
But today I’m rather talking about the stock part of the allocation strategy and I’m ignoring investments in other asset classes like bonds, real estate and saving deposits. Just for the simplicity of this article.
Having said that, the dividend portfolio allocation strategy which I’m presenting to you today is very straightforward and it consists only of the following considerations:
- number of portfolio positions
- differentiation in tiers to express my conviction
- thresholds per sector
- exposure to currencies
Number of portfolio positions
Personally, I’m not too bothered by the number of stocks I own from a diversification point of view. But I do find it important to keep it manageable from a time and effort perspective.
This is why I have chosen to limit my portfolio to a maximum of 50 positions.
Note: this was 40 before, but I’ve updated it to 50. I’m analyzing a lot of stocks as a blogger, hence I have the time to maintain my understanding of about 50 stocks.
And the great thing is that this also addresses my fail-safe mechanism. I simply wouldn’t feel comfortable losing 10% of my dividend income because a single company is cutting its dividend (single stock risk). And I know this from my own experience, because this is exactly what happened to me when Royal Dutch Shell cut its dividend last year.
I can however carry a single dividend cut which would cost me between 0.1% and 5% of my annual dividend income. In such a case I would know that I can count on the other stocks in the portfolio to carry the loss. This holds especially true if the others keep increasing their dividends by an average of 5% annually.
There are actually several academic theories that prove that you don’t need to own more than 10 stocks in your portfolio from a risk and reward point of view. Ray Dalio explains this very nicely in a video.
Differentiation in tiers
Some of those 40 stocks will be slow-growers and others will be fast-growers. Some will have a very large moat and others might have no moat at all. I think you get the point.
In the end, I need a core of high-quality dividend growth stocks as the anchor of my dividend portfolio allocation strategy. But from the other side, I would like to allow some space for some specific stocks as well.
This is the reason why I have categorized my stock into 4 tiers:
- Tier-1: 10 core anchor stocks covering each 4% of my dividend income
- Tier-2: 10 core stocks covering each 3% of my dividend income
- Tier-3: 10 supporting stocks covering each 2% of my dividend income
- Tier 4: 10 special stocks covering each 1% of my dividend income
- + another 10 Tier-4 stocks as part of portfolio expansion announced here.
Looking at those tiers, you can see that tier 1 stocks are the foundation of my portfolio. This means that they should be of the highest quality possible because they are going to pay the majority of the dividends in my retirement.
A tier is not something fixed though. I am regularly re-evaluating the stocks in my portfolio to ensure that I have the right stocks in the right tier.
No matter how much time I spend analyzing a stock, in the end, every great business can go bad. Even the king of all dividend stocks, Johnson & Johnson, will go bad one day. From that point of view, the stock market is not that much different than mother nature. Companies come and companies go.
Industry diversification – threshold per sector
Building a dividend portfolio also requires me to think about my sector allocation. What sector do I truly believe in and should form the core of my strategy? Which sectors support secular growth trends and which are facing very difficult times?
As an example, it is very clear to me that Health Care and Information Technology will be the sectors to be overweight during the upcoming decade. On the other hand, I’m not too sure whether the same applies to the materials sector.
Hence, I have decided to allocate the following percentages to sectors as a threshold for the positions in my dividend growth portfolio:
As a rule of thumb, I’m having an approach of having maximum of 2 stocks of a given industry in a single Tier.
As you can see, this overview also shows why I call myself a conservative investor.
The Consumer Staples sector is known for being defensive and it typically provides downwards protection during a recession. This makes sense, especially if you believe in Maslow’s theory. People naturally choose food over jewelry during tough times.
Another example is my conviction about the Healthcare Industry. I know that some investors are a bit anxious about the influence of politics and what Medicare for All could do to the healthcare industry. But if you look at Big Pharma and Biotech then I truly believe that we are at the brink of a very bullish and disruptive era.
I think that further breakthroughs in for instance computing power (i.e. quantum computing) will become a boon to the biotech industry. I really wouldn’t be surprised if 95% of cancers become curable during the remainder of my lifetime.
At the same time, those big pharma companies are very well protected by their patents. A well-managed pipeline of drugs and targeted acquisitions will provide many of us with strong dividend growth for years to come.
Last but not least, the global population is still growing and we will suffer more and more from complicated diseases as time progresses. Therefore, in the long run, I truly believe in the blue-chip companies in this industry.
Other sectors in this table have similar stories, but as you can see, I’m not such a fan of:
- Materials (too few companies that I know of)
- Utilities (not in my area of interest).
- Financials (I don’t like banks, but I do like insurance companies!)
Exposure to currencies
As the title of this blog suggests, I’m a dividend growth investor based in Europe. Therefore I’m also in a need to have a healthy exposure to companies from the Eurozone.
I noticed this after 3 years of investing in dividend growth stocks because more than 80% of my portfolio was based on US Dollars.
This is something that I didn’t feel comfortable with. There’s just so much going on in politics, i.e. currency wars, trade wars, protectionism. Hence, I didn’t want to be over-reliant on a single foreign currency.
At the same time, European companies are often easier to understand for me. I tend to recognize their products and services quicker and they are also often passing by in the news.
The only downside is the lack of dividend growth culture as part of the dividend policies of European companies. This means that it takes me more effort to find those European companies although I have expanded my knowledge quite a bit over the last 2 years.
Having said that, the allocation of European dividend growth stocks that I aspire to in my portfolio is a minimum of 30%.
My desired dividend portfolio allocation
Let’s have a look then at how I’ve designed my portfolio allocation strategy!
I didn’t have the chance yet to invest in all of these stocks, because some companies like Nike were so far not attractively priced. I’m just crossing my fingers for another proper dip 🤞.
|4%||1||JNJ||Johnson & Johnson||Healthcare|
|4%||1||SWX:ROG||Roche Holding AG Genussscheine||Healthcare|
|4%||1||PEP||PepsiCo Inc||Consumer Staples|
|4%||1||MSFT||Microsoft Corporation||Information Technology|
|4%||1||APPL||Apple Inc||Information Technology|
|4%||1||ETR:MUV2||Muenchener Rueckvrschrng Gslchft AG Mnch||Financials|
|4%||1||AMS:AD||Koninklijke Ahold Delhaize NV||Consumer Staples|
|4%||1||O||Realty Income Corp||REITs|
|3%||2||AMS:UNA||Unilever NV||Consumer Staples|
|3%||2||TXN||Texas Instruments||Information Technology|
|3%||2||NKE||Nike Inc||Consumer Discretionary|
|3%||2||AMS:WKL||Wolters Kluwer||Information Technology|
|3%||2||AMS:RDSA||Royal Dutch Shell Plc||Energy|
|2%||3||AMS:DSM||Koninklijke DSM N.V.||Materials|
|2%||3||EPA:BN||Danone SA||Consumer Staples|
|2%||3||OHI||Omega Healthcare Investors Inc||REITs|
|2%||3||XOM||Exxon Mobil Corporation||Energy|
|2%||3||INTC||Intel Corp||Information Technology|
|2%||3||HSY||Hershey Co||Consumer Staples|
|2%||3||AMS:ASML||ASML NV||Information Technology|
|1%||4||SBUX||Starbucks Corporation||Consumer Discretionary|
|1%||4||BMY||Bristol Myers SquibB||Healthcare|
|1%||4||BHP||BHP Group PLC||Materials|
|1%||4||DLR||Digital Realty Trust||REITs|
|1%||4||BME:REE||Red Electrica Corporacion SA||Utilities|
|0 Extra||4||HPQ||HP Inc||Information Technology|
|0 Extra||4||SBUX||Starbucks||Consumer Discretionary|
|0 Extra||4||TROW||T-Row Price Group||Financials|
|0 Extra||4||AMS:ASRNL||ASR Nederland||Financials|
If you would like to have some more stock inspiration, then feel free to have a look at the following articles:
As mentioned before, the 40 stocks listed above are not something fixed. I review and reassess my portfolio on a regular basis, so feel free to recommend new stocks to me.
So far, this allocation strategy has been working for me. It is easier to monitor and follow a pre-defined set of stocks and it helps me to eliminate the noise. At the same time, it allows me to study the stocks at my own pace so that I am prepared to double down once a stock trades at a very attractive price.
This is how I was able to accumulate a full position in ABBV in 2017 very rapidly when there was quite some negativity around the stock. Hence, doing your homework is already half of the job!
This concludes my approach to my dividend portfolio allocation strategy.
I’m very interested to hear from you now. What do you think about my allocation strategy? Is there something that you would do differently? Do you share overlap with my aspired portfolio? Any stock ideas?
I hope this was helpful and that it will help you in designing your own dividend growth portfolio.
Just let me know and feel free to leave your question/feedback in the comment section.
European Dividend Growth Investor
Change Log – Dividend portfolio allocation strategy
- 1 January 2020: Initial creation of this page
- 8 May 2020: Updates, read more.
- 4 June 2022: Updates, read more.