DivGuy

This is the eighth in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

Managing a dividend portfolio is a fairly low maintenance activity. The purpose is to have low portfolio turnover to avoid trying to time the market, to avoid unnecessary trading fees, and to avoid unnecessary taxation, while all the while building a larger portfolio and increasing levels of passive dividend income.

But buy-and-hold doesn’t mean set-and-forget. It’s important to routinely review your investments, make note of any changes, and to invest accordingly. Taking time to determine which investments you’re interested in adding more capital to, and which investments are deviating from your investment thesis or not meeting your expectations (of fundamental performance, not stock performance), or becoming overvalued, allows you to streamline and enhance your portfolio and returns.

I spend more time on investing than I would estimate that the average dividend growth investor does (or should), since it’s a hobby of mine, and I write about it. Maintenance for my own portfolio is fairly low, however.

Regularly, give the portfolio a quick check to look for news and updates. Stock price changes matter little for long-term investors, but a large stock price swing either way is an indication of a piece of news that might be worth reading. Google Finance is a good tool for this, because you can scan your portfolio prices and top portfolio news stories on one page, and if you have an email account there, it can all be checked quickly within one log-in. How often one does this is up to the investor (and likely dependent on whether the investor is a hobbyist or if they only invest for the sake of the outcome), but there’s no reason to get too crazy about checking stocks.

Occasionally, give the portfolio a more thorough check by looking through valid news on your investments, and possibly checking various useful sources of opinion (I enjoy Seeking Alpha and Morningstar, in particular, as well as fellow dividend blogs). If possible, add fresh capital to the portfolio on a regular basis, and keep a “watch list” or a “buy list” so that you have stock ideas ready for purchase rather than making up your mind on the spot when fresh capital comes in.

Annually, give each investment a thorough re-analysis. I do this throughout the year, so that once per year, I have analyzed my entire portfolio again to ensure that my companies are still in line with my investing thesis. In addition, I vote in annual shareholder proxies for my holdings, and I particular advocate doing this because healthy capitalism depends on prudent corporate governance. One of my reasons for starting this blog was to hopefully make my time more useful by spreading my discovered facts and opinions with others, to help stabilize my commitment towards thorough stock analysis, and to be part of a community where I can continue to find good ideas. This is a reason why I typically recommend a fewer number of portfolio holdings than some other individual dividend investors might- having a moderate amount of positions makes portfolio maintenance more reasonable, makes voting less time consuming, and allows investors to have a more thorough understanding of their businesses.

Knowing when to sell a stock can be difficult. I keep my portfolio turnover especially low, but still reduce or eliminate a position from time to time. Sometimes my risk preferences change, or a smaller holding is overvalued and I have a significantly better opportunity in mind, or more rarely, a company deviates from my original investment thesis. A little bit of rebalancing to take money from high-performing richly-valued stocks and allocating the capital towards stocks you are currently more favorable toward can be a good idea, but only if the expected rate of return of the new investment is considerable compared to the sold asset, even after fees and taxes are taken into account.

For a more in-depth article on selling stock, see my previous article on the subject: 3 Reasons To Sell a Dividend Stock. When it comes to pruning a portfolio, the saying of “less is more” typically holds true, but failing to prune at all is not optimal.

How much time you decide to spend on investment is up to you, and mainly should depend on your goals and your level of interest. These are my suggestions and experiences. Fortunately for individual investors, dividend growth investing is among the lowest maintenance of all investing strategies, next to pure indexing.

This is the seventh in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

The previous step was about starting small. For long-term investors, rather than jumping completely into an investment with a large single trade, it’s wise to build positions over time, depending on the amount of capital employed. This step is the longer-term extrapolation of this method, and covers two sorts of commitments: commitment of confidence to core holdings, and commitment of continued capital input.

Commitment to Confidence of Core Holdings
As you become very familiar with an investment, and you’ve been adding to your positions, you’ll start to build fairly respectable position sizes.

There are different ideas out there about the optimal position size. Warren Buffett has suggested that 6-7 positions is optimal for a personal investor. Some people suggest 10 or so positions, and others suggest 20+ or 30+ positions. The fewer positions, perhaps the closer you can pay attention and get to know your investments, but the more concentrated the risk is. You’re more prone to outright outperform or underperform the market. The larger number of positions, the harder it is to pay attention to, and really get to know, your investments. It becomes more of an index fund of companies that will likely more closely match the market.

I don’t put forth a claim on what the optimal number of positions is. It likely depends on personal preference, tolerance to risk, portfolio size, life goals, whether you use index funds and how much of your portfolio they make up, and financial obligations and responsibilities.

But I do think it’s worthwhile to really commit meaningful capital to investments that we believe are great choices. When you’ve analyzed an investment to the best of your ability, when you’ve sought out trusted opinions on the company, when you’ve invested in the company and built your position over time, and when you’ve revisited your investment thesis multiple times from different angles with the same conclusion, it can be a good idea to establish “core holdings”. That is, a set of strong companies with large moats that act as foundations for your portfolio that you have high certainty for. It’s a choice that, if your investment thesis is correct, can give your portfolio very meaningful growth and stability. Companies with extremely strong financial positions, a history of strong dividend growth, and that are operating in an industry that won’t be going away any time soon are often good choices for a core holding. The ideal balance is such that if one of your top investment decisions were to be wrong, it wouldn’t devastate your portfolio, but if it were to be right, would give your portfolio a worthwhile boost.

I don’t particularly advocate extremely broad diversification. Apart from diluting core holdings, it makes it significantly harder to consistently vote in shareholder elections, which is something I really suggest doing. It’s good to have diversification, and the level of diversification will vary depending on personal differences, but it makes sense to commit meaningful capital to, and be confident in, your top investment decisions. My personal strategy of dividend investing is to have several (five to ten) primary holdings, and another 10 or so lesser holdings to round out diversification and volatility, plus of course other asset classes such as bonds.

Commitment of Continued Capital Input
Regardless of your chosen position size and level of diversification, the most important aspect of building wealth is to stick with it. A lot of us may know a certain type of guy- the guy at work or the neighbor that “dabbles” in investing. He plays around with a taxable investment account. He may enjoy talking about what positions he is holding lately, how they are doing, etc. He may even do well- making more money than he loses. But as the years go by, he’s still just playing games. He may have a few thousand dollars in there, which he manages to compound a bit from time to time, but doesn’t view it as a consistent wealth-building path and doesn’t diligently add fresh capital to it.

A committed wealth-builder, on the other hand, has the focus on long term wealth accumulation rather than just a few hundred bucks in occasional stock gains. She or he consistently adds money to the portfolio, maybe every month or every other month, like clockwork. This is where the psychological edge of dividend growth investing comes in handy. The focus of this investor is constantly on growth of the passive income stream and on growth of the total portfolio wealth, rather than short term fluctuations. The investor is familiar enough with her financial position, her income, and her investment strategy to make fairly accurate long-term goals of how much passive income she wants by a certain date (five year goals, ten year goals, etc), and then hopes to meet or exceed those goals.

The most important aspects of investing are asset allocation and the discipline to consistently add capital. Individual investment decisions are secondary. To build wealth, one must be the wealth builder rather than the “dabbler”- consistently add money to your portfolio, ensure you have adequate asset allocation and diversification, and think strategically far ahead.