Why I Eventually Want To Be Invested In 50 Companies: Income Diversification

castlefreedomI’ve been building my Freedom Fund for over four years now, shaping it from nothing into a portfolio chock-full of equity in high-quality companies that pay rising dividends. I now have investments in 46 companies, and for some that’s probably too much to manage. However, I love to manage a portfolio like this. To me, it’s fun to follow dozens of companies. I guess I get high on capitalism sometimes!

However, while it’s fun to manage a large portfolio, there comes a time when it’s too much for one person. I personally plan to stop investing in new companies right around the time I hit my 50th stock investment. I may go slightly over 50, but not by much.

While 50 isn’t a magical number per se, for me it represents income diversification.

Think about this for a second: How secure is your income? How much of your income is derived from your day job? Could you be fired from this job at any given time? If you were fired, what would you do? How would you pay your bills? 

In life, our emotions are largely affected by money. Personally, financial security has a big impact on my ability to be happy and live a fulfilling life. And I can think of no better way to secure my financial future than to make sure my bills can always be comfortably paid for. As such, I’ve become a dedicated investor in high-quality businesses that pay rising dividends because it’s the best way I know to ensure financial freedom for myself. I realized a while ago that I want to minimize the risk of loss to my income, and having 50 income sources through a portfolio of dividend growth stocks is much less risky than a job where your income is derived from one source. Seeing as how I’ve recently taken a pay cut at work, I can only think of the me of four years ago as prescient.

50 different common stock investments means security, diversification, and freedom to me. At that level of diversification, it means that if one company were to eliminate its dividend, I would only be out 2% of my income, assuming an evenly-weighted portfolio. And while my portfolio is far from equally-weighted right now, it’s still being built every single month.

I often think of my portfolio as a castle of freedom – Chateau Freedom, just like Warren Buffett refers to individual businesses as castles. And while the moat around a business is the summation of their economic advantages, I like to think of the moat around my castle as the amount of income diversification within the castle. If I were to invest in just five companies and one eliminates its dividend, the moat between my castle (freedom) and the outside world (where I work for a living at a job I don’t enjoy) narrows by 20%! All of the sudden marauders (bill collectors) may start to sniff around the idea of taking my castle down, and I’d better have my résumé handy!

Conversely, investing in 50 different companies means my castle’s moat is quite wide. A 2% reduction in the size of my moat isn’t enough to cause extreme worry, assuming I have some margin of safety built in between my dividend income and my monthly expenses. Furthermore, a 2% reduction in annual dividend income would likely be made up by the 49 other companies’ dividend raises throughout the year anyhow, thereby replenishing the size of the moat. For instance, if I were receiving $20,000 in annual dividend income and one company eliminates its dividend which reduced my passive income by $400/year, I would see an increase in annual dividend income on the order of $1,176 if the other 49 companies raise their dividends in aggregate of 6%. Moat replenished! Résumé gladly goes back in the drawer. Marauders go home.

I’m not saying 50 companies is the ultimate form of passive dividend income diversification. This is all rather subjective. Furthermore, quality is just as important as quantity. Investing in 50 companies that do not possess high-quality aspects which improves their prospects of continuing to raise their dividends for the foreseeable future means your moat may be more shallow than you might think it is. No sense in investing in 50 companies of dubious quality if the slightest change in macroeconomics to their disadvantage means your income dries up, and with it the moat around your castle of freedom.

I’d personally recommend investing in a number of companies to where the raises by other companies in the portfolio throughout the year can make up for a dividend cut/elimination by one or more positions within the portfolio. If you can realize a dividend cut/elimination or two and still end up with a higher projected annual dividend income at the end of the year, then you’re in fantastic shape. Moreover, I’d recommend to stick only with the highest-quality companies you possibly can. I remain extremely picky with the companies I’ll personally invest in, and with only four or so potential roster spots open in my portfolio, I know it’s imperative I make sure the companies that go into the portfolio have substantial competitive advantages and great overall prospects at paying and raising dividends for the foreseeable future.

As such, some companies that I’m not yet invested in that remain high on my watch list for potential additions to the Fund include: General Mills, Inc. (GIS), Nestle SA (NSRGY), Colgate-Palmolive Company (CL), Automatic Data Processing (ADP), Unilever Plc (UL), and The Clorox Co. (CLX).

Full Disclosure: None

How about you? What level of income diversification are you looking for? 

Thanks for reading.

Photo Credit: Grant Cochrane/FreeDigitalPhotos.net

Comments

  1. Jerry says

    good article. I have 25 stocks so far. 23 of which are divy stocks. I never really thought about the number but things are definitely slowing down as far as what I can add. I can’t find good value in the US. I have ADP on my radar but would like it to drop even more then it has the past couple days to feel good about it. I’m also toying with the idea of an emerging market divy ETF like VWO but that went up this past week so that’s out for now. I need this pullback to continue to open up some more possibilities.

    • says

      Jerry,

      I hear you on wishing for a pullback; I’d love to see cheaper stocks. In the meanwhile, I’ll continue searching for value wherever I can find it. :)

      And great job accumulating a portfolio of 25 stocks. That doesn’t happen overnight!

      Cheers.

      • Eki says

        Have you looked at European stocks in addition to those you already mentioned? From Germany for example Munich Re, Volkswagen, Daimler and Allianz are reasonably valued and have decent dividend policies. In addition to Nestle from Switzerland there are good dividend paying companies like Novartis and Swiss Re. Or are the dividend taxes too high for you compared to US listed stocks?

        • says

          Eki,

          I was just commenting about Munich Re, but I don’t think I have access to equity in that company here in the US. I’m not able to find any ADR or ADS shares? Maybe I’m incorrect on this one.

          As far as Swiss companies go, the withholding is a little frustrating, but nothing that can’t be overlooked since I can reclaim it at tax time. However, the withholding combined with the annual dividend payout does damper my enthusiasm a bit.

          Thanks for stopping by!

          Best regards.

  2. says

    A break even portfolio would consist approximately of 18 positions. At 18 positions, assuming a 3.5% yield each, they would account for $1,111 in dividends per position. Losing one completely would take your $20,000 of annual dividends down to $18,889. If those remaining 17 positions increased by 6% that year, you’d end up with $20,022 of dividends.

    That being said, it is always best to err on the side of caution. Your added diversification allows your income stream to keep growing provided you achieve growth in your remaining positions. Personally I am looking to end up around 40 or so positions, but that is always subject to change. This gives a nice margin of safety through income diversification as well as is a nice middle ground for maintaining tabs on each position.

    As a note, I believe your increase would only be $776 if your one position stopped paying out completely.

    • says

      W2R,

      I think an end result of 40 or so stocks makes a lot of sense. At that point you’re getting plenty of diversification in regards to income while also not overwhelming yourself. Makes sense to me!

      As far as the math goes, I thought I had that right. $20,000 divided by 50 positions equals $400 in income per position (assuming equal weight). $20,000 minus $400 equals $19,600. $19,600 times 6% equals $1,776. I’m not quite sure where you got $776? Am I missing something? Let me know if I am so I can correct it.

      Best regards!

      • says

        Math can be a funny thing when we look at the same thing from different angles! You’re talking about the gross increase on the remaining 49 positions, and I’m referring to the net increase from the overall $20,000 of dividend income.

        My $776 comes from the 49 remaining positions dividends of $19,600, plus the gross 6% increase of $1,176, less the original income level of $20,000. This equals $20,776, or an increase of $776 over the initial $20,000 dividend level.

        • says

          W2R,

          Whoops. I meant to say $1,176, not $1,776 in my last response.

          And now I get what you’re saying here. You’re indeed right that math is funny like that! I was looking at it as the lost income being replenished by the gains, and you were looking at the total income gain net of the loss. Either way, it’s a good position to be in. :)

          Thanks for pointing that out. My mind wasn’t seeing it like that.

          Best regards.

  3. says

    I understand your 2% allocation (per company) Jason. For me I think the magic number is between 20 and 25 dividend growth stocks. Although, to be fair, that’s in addition to two index ETFs…..and my side business. Those income streams appear to be the right mix for me.

    As an aside, I have received a few emails asking for a tab on my site….listing my current portfolio mix. I had held off doing so because I don’t want people to blindly follow any of my picks, but in the interest of transparency I will make the change. Mama and baby are well, thank you for asking the other day :o)
    -Bryan

    • says

      Mike,

      You got it, bud. I was very glad to see that. Between that boost and Wells Fargo’s recent hike I just about have enough material to release another ‘Dividend Raise’ article.

      Cheers!

  4. says

    DM,

    Do you worry about sector diversification? I feel like I don’t want to invest to much in one sector. I am under weight for one reason or another. Haven’t found a Utility yet for example and financials I am just not comfortable with more than I have.

    I too am looking for 50ish positions, plus I have several I may sell that I bought when I was first learning and feel like they are good, but given my time horizon can be replaced with faster dividend growers.

    I read a post a while back from you where you mentioned to view each company as it’s own income stream. I had previously thought about my investments as one monolithic “stocks”. Your insight was an aha moment and further increased my comfort with stock investing.

    Take care!
    ILG

    • says

      ILG,

      Great question there.

      I don’t really worry about sector diversification so much. I instead worry about the quality of my companies. I would never sacrifice a high-quality company for a lower-quality company simply because the latter was in a sector I wanted exposure to. I want to maximize the potential of increasing my passive income rather than exposure to certain sectors. That’s why you’ll see I have lower exposure to tech and utilities. I don’t always understand the former, and I’m a bit worried about the growth rates with the latter.

      And I definitely think of each company as its own income stream, because each company I’m invested in is a real, live company out there serving millions or billions of people around the world with real products and/or services. As such, they’ll generate their own, individual profits and share those profits with me in the form of dividends. Some will do better than others during certain time periods, but that’s why we diversify. If Coca-Cola is having problem with carbonated beverage volumes in 2015, I may see better-than-expected results from Chevron due to some older investments providing new revenue. That’s how I look at it.

      Best regards.

    • Ravi says

      If you’re a dividend investor, you will naturally be overweight energy, telecom, consumer goods, industrials, and financials (probably a few others as well).

      In most cases, there will be a disinclination toward owning tech stocks just because there aren’t many large dividend champion technology stocks. This applies to other sectors as well.

  5. says

    50 companies is good amount of diversification. I’m at 41 companies right now, and I think I might stay at that number because I am approaching the end of the accumulation stage. If I had to continue accumulating for another two years I think that number could have grown to 50 because some of the companies that I’ve been watching would have probably gone on sale.

    I don’t allow my positions to exceed 5% of my dividend income, so having 41 companies makes that easy to achieve.

    • says

      Spoonman,

      “I am approaching the end of the accumulation stage.” – That must feel pretty good to be able to say that, huh? :)

      And I think making sure no one company exceeds 5% of your dividend income is a pretty good rule. It probably wouldn’t be too hard to overcome a 5% income loss if one position altogether cut its dividend, but if you get much more than that it might be tough to bounce right back.

      Cheers!

  6. says

    I’m a big fan of diversification as well. I think I had 22 stocks or so at one point… Now that I’m focusing more on real estate, I’m trying to get into 4-5 markets… I’m currently investing in 3 right now.

    That way if a local economy collapses, it won’t annihilate my entire portfolio! Investing will always carry with it some inherent risk… just gotta do the best you can to minimize it. Also, would like to get over 10 units to hedge on vacancy.

    I think 50 stocks is a good number. Having a lot more after that point won’t really add much protection… and it’ll be like building an index fund after some point.

    Also, you want to go with your “best ideas”. At some point, you’ll probably run out of top tier companies to invest in.

    All the best!

    • says

      FI Fighter,

      That sounds like a great plan in regards to real estate diversification. Not only are you diversifying between markets, but also property types. Good for you!

      I’d eventually like to diversify asset classes as well, but right now I don’t find bonds attractive and real estate doesn’t work for me right now for a number of reasons. That’ll likely change at some point though.

      Best wishes!

  7. BCS says

    DM,

    I also feel being diversified is a very important strategy when it comes to investing. I think of it as a form of insurance. I don’t have a set number stocks or companies that I am targeting. Rather, I prefer to try to attain equal weight in the 10 “sectors” plus REIT’s, basically a total of 11 investment areas. So my strategy is to have around 9% of my money in each of those 11 areas. But I try to diversify within each sector as much as possible as well. For example, 3 months ago I initiated a position in Pfizer, a pharmaceutical company. Two weeks ago I needed another health care company to keep close to my target balance, so I bought Baxter because it is more geared to healthcare equipment. I would have preferred the juicy yield that Astrazeneca pays, but I wanted to spread my risk. My next purchase will probably be a Utilities company. I already have Consolidated Edison (Multi-Utilities) and Xcel Energy (Electric Utilities), so when I buy it will either be a Gas company or a Water company. Wherever I can find the best value. If I don’t like a new company, then I will re-invest in ones that I already own.

    Keep up the great work!

    • says

      BCS,

      Sounds like you’re diversifying very nicely there. I tend not to pay too much attention to sector diversification, instead choosing to stick with the highest-quality companies I possibly can. If I have a little too much allocation to energy and consumer stocks because that’s where the future is, then so be it. However, I try to make sure I don’t go too crazy here.

      And I think you made a nice buy there on Baxter. I’m a fan of the company for the long haul. :)

      Take care.

  8. Bruce D. says

    Jason, I think you have started going this direction a little bit, but I wanted to ask more directly. Since you are younger and have plenty of time for growth and compounding, how do you feel about 25-30 of the straight blue chip, dividend champion stalwarts, plus a nice mix of 10-15 higher growth dividend companies that may grow into being dividend contenders/champions? I’m talking about stuff like TJX, ROST, V, MA, SBUX, NKE, VFC, FDO, etc. My question isn’t to suggest that these are buys at their current prices, but to see if you’ve considered some lower yielders that grow their dividends at a 15-20% annual rate and spin off absurd amounts of cash.
    I ask for somewhat selfish reasons, as I have decided to try to slot some of these higher growth companies in with the “boring” and more traditional blue chippers.

    • Ravi says

      I’m employing a similar strategy. Around 2/3 of my stocks are dividend payers that I plan to hold onto. The remaining 1/3 are a mix of growth and dividend stocks, but more risky and I don’t necessarily plan to hold onto them for the long term. I buy stocks with the expectation that I can earn a capital gain of at least as much as my avg payout earnings. For me, I would buy a stock if I see at least 10% upside and limited downside. I’ll see in a few years if this strategy works, but my plan is to hopefully take some more capital gains over the next 5-10 years and once I’ve hit a solid return down the road I can sell off a position and move into something that’s more of an income stock when the time is right. Since I don’t plan to live off my dividends for many ears to come, I think having a good mix between reinvesting dividends and taking gains from growth stocks and putting the earnings slowly back into income stocks will be a winning strategy (or at least good enough). :)

      • Bruce D. says

        Ravi, good to hear I am not alone. I can’t stray too far from the “carrot” that is regular dividend payouts, but I also enjoy trying to find some underfollowed gems or future growth all-stars. Because I have so much time, I think I will probably be spending the next 20+ years trying to find the right balance between value (or valuation), growth, dividend yield, and dividend growth. That’s what leads me to these blogs and comment sections

    • says

      Bruce D.,

      I like many of those companies, especially V, SBUX, VFC, NKE. However, the valuations have not allowed me the opportunity to invest. I looked at V a while ago when it was just below $100/share, and I, to my detriment, passed it up. Big mistake. There’s many stocks out there that I’d love to have, but the price has to be right. Costco is another company I’d love to have an equity stake in, but the valuation hasn’t made sense for me…not to mention the low yield. So for me, it’s not just the low yields but the high valuations. And I also keep in mind that high growth rates may not hold for many years, at which point those high valuations would make even less sense.

      I tend to like the “sweet spot” dividend growth stocks the most, where you’re getting comfortable current yield in the 2.5%-3.5% range, with 6%-10% growth rates. That’s where I’ve personally found the most success.

      I hope this helps!

      Best wishes.

      • Bruce D. says

        Sounds good to me. By the way, I’m glad you didn’t take it as an attack on your investing style — I just enjoy engaging you and others in discussion and bouncing ideas around. I feel your pain on the valuation issue. I have had to just bite the bullet on a few like UA, SBUX (which I recently sold at 75), MA, V, and DIS and buy them on a “decent” pullback, with the idea that they will be higher in 20 years, and I would gladly buy if they had dropped after my purchase.
        2 other questions, if you have time =)
        1) I apologize if you’ve answered these previously, but in your taxable account, have you considered MLPs such as EPD, ETE, SXL, and MMP? I’ve owned SXL and MMP for quite a while, and their distribution growth is just phenomenal. I’m not sure I will want to deal with their tax issues for too many years, however
        2) Have you looked at BGS? Their debt seems to be crazy, and I have the sense that their constant acquisitions make a good analysis almost impossible without a nice forensic accounting review.
        Thanks again for the discussion

        • says

          Bruce D.,

          I don’t invest in MLP units because I like simplicity when it comes to tax season. While some investors claim the K-1 is no big deal, I’d rather just avoid it.

          As far as BGS goes, I’ve never actually looked at it. Just from a quick peek, there’s some things to like and not like. The valuation is high right now, and the company sports a rather unhealthy balance sheet. The payout ratio is high, but the dividend is comfortably covered by FCF. Growth has been strong up until the last few years, but I don’t see how the past growth warrants the current P/E ratio. I like the yield, though. :)

          Best regards!

  9. says

    DM,

    I have some high yield plays that may not be the most solid ones to own, but they have held up well. I’ve had a few cuts here and there. With that said I may go well over 50 stocks. If I count my other accounts I probably am already. There are still several great companies out there I’d love to own a piece of to solidify and back up some of my riskier speculative high yield holdings. You own quite a few I’d like to be in sooner or later as well.

    • says

      SWAN,

      I hear you. It’s tough to satiate my appetite for stocks. There’s still probably 10-15 stocks that are high on my list, and yet I only have room for a few. However, there’s probably also room for some occasional pruning if it makes the tree stronger.

      Best regards.

  10. says

    Nice post Jason and a timely one. I’ve been thinking about portfolio construction quite a bit recently.

    I think 50 is a good number as well. As long as you only hold blue-chip dividend growth stocks, keeping up on that many shouldn’t be that difficult. I currently hold 15 plus one ETF and looking at my stock watchlist/wishlist, I could probably get it up to 42 or so without even searching for any other companies. Just need the cash and some pullbacks. ;)

    In addition to dividend income, I’d eventually like to get into rental properties so that I can diversify my income stream across multiple asset classes as well. Tim McAleenan had a great post a while back about creating a “wealth generator” that you could use to fund your DGI investments. I think he said he wanted to use high-yielding MLP’s to get the cash flowing so he could fund purchases in stocks like KO, GIS, etc. Having steady cash flow from a rental house in addition to surplus income from a day job I think would really help me build up my portfolio and at the same time add more income diversification.

    Best wishes,
    SFZ

    • says

      SFZ,

      Absolutely. A rental property, if done right, can be a great cash flow generator. And you can then use that free cash flow to reinvest in high-quality stocks, which would propel your wealth over the long term ever higher. However, I realized a long time ago that I’m not cut out to be a landlord. Just not for me. Wish it wasn’t that way, but I prefer simplicity in my life.

      But I wish you luck. Owning a rental property or two along with a high-quality portfolio of blue chip stocks puts you in a very, very good spot! Throw in some corporate bonds (eventually, when rates rise), and you’re probably untouchable.

      Cheers!

  11. Ravi says

    I’m not sure yet when I would want to start using my investments to live, so I think I’m more focused on total return than just dividend growth. My taxable portfolio is mostly dividend stocks since I try to find good cash flows from there (50%), while the majority of my IRA is in index funds (35%), and then I’ve got another taxable account with Prosper in p2p loans (15%).

    I like the mix for now, and hope to grow them each in tandem. I see the IRA outpacing the taxable account and p2p over the long term, but it will be in mostly unrealized gains.

    I hope to have a solid $100k stock portfolio in around 3 years. By then, I’ll feel great about the size of my snowball!

    • says

      Ravi,

      I hope you get that six-figure portfolio even sooner. I wanna see that snowball rolling downhill at a high rate of speed. :)

      And it seems the P2P loans are pretty popular. I may have to look into that at some point in the near future.

      Take care!

  12. says

    Great Post and thanks for sharing our ideas and tips / list of companies you are considering. That helped. One thing to consider is the advice of investors like Warren Buffet against diversification. I am not sure if it applies to everyone, but would love to know your thoughts on that.

    • says

      Hari,

      That’s an interesting point there with Warren Buffett. I’ll come right out and admit I’m not even close to as skilled as he is, so sticking only to a few of my “best ideas” may lead to suboptimal returns for me. I’d rather diversify and make sure the mistakes I know I’m going to make don’t sink my ship.

      Besides I’m not running money for anyone; I simply need to make sure my income is as secure as possible. And I think this strategy should serve me and others fairly well over the long haul.

      Best regards!

  13. jon says

    Hi DM,

    How do you manage 50 stocks ? – easy when you have KO, PG, JNG etc there is nothing to manage. Buy at a good valuation and that’s it – hold for rest of your life. What’s their to manage ?

    You will occasionally have to deal with mergers, acquisitions eg VOD sold VZ stake, but I would hardly call that work, in fact its always interesting when something like that happens.

    I currently hold 26 UK stocks and 10 USA stocks. When I’m finished I will end up with 32 UK stocks and 25 USA stocks and then portfolio is on auto-pilot.

    I will diversify into fixed income later but for now let the dividend compounding compound. I have a couple of ETFs (like Emerging Markets, Asia Pacific) where its difficult for me to purchase/understand the companies.

    I would suggest you diversify your wealth across brokers though. I use 3 publicly listed brokers.

    Also, I would add Diageo and SAB Miller to high quality companies to purchase.

    Thanks for your blog, I’ve been an avid reader for years. Its inspirational.
    Regards, Jon from UK

    • Patric says

      Hi Jon,

      Im looking for some “safe” UK dividend stocks. Do you have any tips?

      Thank you in advance

      • Jon says

        @Patric

        I try to diversify across industries, my portfolio includes:

        Glaxo (GSK) – Pharmaceuticals & Medical
        Astra Zenica – Pharmaceuticals
        Imperial Tobacco (IMT) – Tobacco
        BP – Oil major
        RDSB – Oil major
        Unliever (ULVR) – Consumer
        Diagio (DGE) – Alcoholic drinks
        SAB Miller (SAB) – Beers
        Reckitt Benckiser (RB) – Consumer (not purchased yet due to high valuation)
        British Land (BLND) – REIT, Commercial Property
        Land Securities (LAND) – REIT, Commercial Property (not purchased yet due to high valuation)
        HSBC (HSBA) – Bank
        Standard Chartered (STAN) – Bank
        Smith & Nephew (SN) – Medical devices (not purchased yet due to high valuation)
        Tesco (TSCO) – Supermarket
        Pearson (PSON) – Media
        Rolls Royce (RR) – Aero engines (not purchased yet due to high valuation)
        Aviva (AV) – Insurance
        Prudential (PRU) – Insurance (not purchased due to high valuation)
        BHP Billiton (BHP) – Miner
        RIO Tinto (RIO) – Miner
        National Grid (NG) – Utility Infrastructure
        United Utilities (UU) – Water Utility
        Scottish & Southern (SSE) – Electricity/Gas Utility
        Experian (EXP) – Credit Agency (not purchased yet due to high valuation)
        Compass (CMP) – Outsourcing, Catering/Food services (not purchased yet due to high valuation)
        Tate & Lyle (TATE) – Food Ingredients
        G4S – Outsourcing, Security services

        Majority of UK companies pay dividends payments semi-annually. The dividends are generally higher yielding. What I’ve noticed from my past few years of dividend growth investing is that UK companies will freeze or cut dividends more often than USA companies. A dividend cut for a USA company seems like an absolute no-no. I’m not too bothered by this, I just re-invest come what may. I often find the dividend cutters grow the dividend aggressively anyway a few years later.

        Of course, make sure you do your own research in depth.

        Regards, Jon

        • Sundeep says

          Hi Jon,

          Thanks for providing that watch list of UK stocks. If I’m not mistaken, we here in the US can invest in your companies without that withholding tax issue, so def worth looking into your list.

          Thanks again!

          • says

            Sundeep,

            You’re correct: UK-based stocks pay dividends without foreign tax withholding. This is due to a tax treaty we have with the UK. That’s why many of my foreign holdings are based there, like BP, VOD, and RDS.B.

            And thanks Jon for sharing! Very helpful!

            Best wishes.

    • says

      Jon,

      Thanks for stopping by from the UK! So glad to have readers from across the pond. :)

      And thanks for the tip. I definitely plan on diversifying between brokers, and I’m very near that position right now. Although I’m covered for up to $500k by the SIPC, my portfolio will eventually eclipse that all by itself even if I never add another dime. I’m currently looking at a few brokers, but TD Ameritrade, Schwab, and Fidelity are high on my list because I like the fact that there are physical branches I can visit if need be.

      And I’d love to own a piece of Diageo at some point. My list in the article was far from comprehensive. And I actually already own a piece of SAB Miller through my Altria holdings.

      Thanks for stopping by!

      Cheers.

      • Ravi says

        Altria has been one of my big winners over the past two years. The capital appreciation has been sufficient all on its own. The dividends were just icing on the cash flow cake!

    • says

      Viisikymppisenä eläkkeelle,

      Haha. I do love my stocks! I agree it may be tough to stop at 50, and I may go slightly over. However, I don’t want to go much higher than that. It’ll get a bit unruly much north of 55 stocks. And there’s probably a little pruning here and there that I can perform over time to make the tree stronger. Every branch matters. :)

      Best wishes.

  14. says

    DM,
    Good example of dividend replenishment if one of your companies cuts their dividend. I never thought of it that way, that the others will grow and cover it. I was not diversified prior to the 2008 crisis and two stocks tanked, cut dividends, and really hurt my income. I was young, so lesson learned. I’m working on building up my portfolio to 20 stocks this year and 30 the next. Probably more down the line, and I’ll supplement with some ETFs for even more diversity. GIS is on my list now too. I may buy in my Roth.
    -RBD

    • says

      RBD,

      Sorry to hear about the income loss during the Great Recession. There’s no way we can completely protect ourselves 100% from such events, as investing in anything has inherent risk. However, spreading that risk as much as possible improves one’s odds.

      And I like GIS as well. It’s definitely a company I’d love to own a piece of at some point. I stupidly passed up around $42/share. Won’t make that mistake again!

      Take care.

  15. says

    Good post, Jason.
    Diversification is the best thing you can do to your portfolio to protect against any nasty news/turns in the economy. In addition, to diversification by industry, I recommend also diversification by geography. My current portfolio consists of 20 stocks and about 8 funds. Stocks – most are dividend growers, some high income and one cut its dividend to zero :( last year – but its a gold mining company, so Im still holding it as a hedge. I am still not happy with my wife’s portfolio where shes completely invested in the Canadian market and has no geographical diversification, so we are going to start working on fixing that.

    regards

    • says

      R2R,

      Sorry to hear about the dividend cut there. That’s never fun.

      And I hear you on diversifying by geography. I have a few international holdings, but the great thing about many blue chip US companies is that they’re multinational and receive a large portion of their revenues abroad. KO, PEP, and JNJ are some great examples. And then there’s PM which generates 100% of its revenue abroad.

      Thanks for stopping by!

      Best wishes.

  16. says

    50 is a bit too much for me, I pretty much invest in around 15-20 with some funds going to a couple of index funds. I tend to invest in both newer dividend growth companies such as SBUX, MA, and ACN and the usual suspects like NKE, COST, GWW, TROW, DIS, UNP, and PSA. In addition, finding true quality is rather difficult, so when I can’t find it I just put new money into one of my current holdings. Good stuff.

    Regards,

    Joe

    • says

      Joe S.,

      I hear you. Managing a large portfolio like this isn’t for everyone. For me, it’s fun. But I can obviously see how this isn’t fun for everyone. I’m just wired a bit differently. :)

      And you have some great holdings there. I see a few I’d love to own, including: SBUX, COST, NKE, and DIS. UNP as well. Good stuff! Keep up the great work.

      Cheers!

  17. rabbithutch says

    Question. I understand that 50 stocks are great for diversification, but what about weighting your investments. You aren’t planning to invest equally in all 50 stocks are you? Surely you would have a larger weighted percentage of your investment in solid, historical stocks like KO, JNJ, PG, XOM. Just curious — as I have just started diversifying into dividend stocks, and currently own 8 stocks, ranging between $4,000 and $25,000 invested in each.

    • says

      rabbithutch,

      That’s a great question there. Thanks for stopping by and commenting.

      I don’t plan to completely evenly weight my stocks down to the penny. However, I don’t plan on specifically allocating large swaths of my portfolio for a few choice companies. While I may think JNJ, KO, and PG will perform better than, say, ITW over the next 10 years, how do I really know? I can’t tell the future, and my crystal ball is always broken. So I plan to make up for this shortfall by diversifying reasonably evenly. My stocks may not be an even 2% across the board when I’m all done, but I’d like to see a 1.6% here and maybe a 3.1% there, and then maybe a 2.5% over there. That kind of thing.

      Best wishes!

  18. donebyforty says

    I think with the right 50 companies, you can achieve a really healthy mix of diversification across industries and company sizes, and perhaps get some good international exposure, too. We’re index investors so diversification comes easily in that regard, but we’re also looking to diversify income via rental properties and side income, too. Right now, nearly all the eggs are in the career paycheck basket…no bueno.

    • says

      DB40,

      I hope you guys are able to diversify your income sources. And rental properties combined with index funds is a fantastic way to do that. The more baskets, the better! :)

      Every dollar I can generate outside of my job is one dollar closer to freedom.

      Best regards.

  19. Wade says

    Love the site. I’m just not sure that 50 US large cap stocks is any sort of diversification. It is probably ok, but a 2008-2009 repeat (which will likely happen at some point) will drop you 40-50%.

    Certainly is many ways to do this…

    • Tom says

      Jason, this post by Wade made me think of a topic I’d like to see you write on.

      I know you don’t care about a drop in your portfolio… it is your dividend stream you are concerned about. So who cares that the crash of 2008-09 dropped stock values by 40%+… what did it do to dividend income?

      Specifically, if the divs of the companies you are are invested in NOW were to mirror exactly what they did in 2008-09, how would your dividend income change? It would be neat to go stock by stock through your portfolio and list if the company increased, decreased, or left-the-same their dividend and by what percentage. Then apply those same percentages to your current dividends and “predict” how your portfolio income would be affected by another crash were it to happen today.

      Well, just an idea. Keep up the good work!

      • says

        Tom,

        That’s a great idea. It’ll take some time to put together, but I’d like to do that. Thanks so much for the suggestion. I’ll have to work on that! :)

        Thanks for stopping by!

        Best wishes.

    • says

      The intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy—from buying high just because Mr. Market says “Buy!” and from selling low just because Mr. Market says “Sell!” If you investment horizon is long—at least 25 or 30 years—there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money.

      The intelligent investors common-stock portfolio is almost certain to fluctuate in value over any period of several years. The investor should know about these possibilities and should be prepared for them both financially and psychologically. He / She will want to benefit from changes in market levels certainly through an advance in the value of his stock holdings as time goes on, and perhaps also by making purchases and sales at advantageous prices.

    • says

      Wade,

      As was pointed out by another reader, it’s not the value of my portfolio that concerns me, but rather the income generation. And I keep in mind that many of the companies I’m currently invested kept on paying (and raising) dividends right through 2008 and 2009. I can’t determine the future, but that’s the point behind this diversification – to put the odds in my favor.

      In addition, I’m not necessarily saying 50 US large cap stocks is the best way to achieve equity diversification. I personally hold small caps, mid caps, large caps, international holdings, and companies from all major sectors. Furthermore, I hope to eventually diversify into fixed income when they’re more attractive.

      Take care!

  20. says

    Nice article! 50 companies sounds reasonable to me. With so many sources of financial information on the internet, it makes it a lot easier to keep up with our companies now than in the past. Plus if you actually enjoy keeping up with them, it makes it so much easier. Not to mention, a lot of the companies we are buying with “large moats”, like KO or JNJ, don’t need daily or weekly research in my opinion.

    For me, I’m right around 40 companies and plan to stick close to that not including half positions. Any further diversification will be in the form of real estate purchases and possibly bonds when they look more attractive.

    • says

      Brent,

      I totally agree. Managing a portfolio that’s mainly filled with blue chips is certainly much easier and less time consuming than managing a portfolio filled with small cap biotechs and tech startups.

      And 40 stocks sounds about right, especially considering your diversification into real estate. You’ve got an awesome situation going on there. Very jealous! :)

      Best regards.

  21. says

    Hi Jason, another great discussion on DGI. I’m assuming once you have your 50+ positions in your portfolio purchased, you will start buying additional shares of the stock on sale that particular month (undervalued) and buy up to 2% of your portfolio value (more or less). Which, if you are shooting for a portfolio value of $600,000 with an average yield of 4% to generate $24,000 in dividend income, each position size would eventually need to be about $12,000, or 2% of $600,000.

    I may have your goals off some (doing this from memory), but will this be your basic approach?

    Once you have built your DG portfolio, would you consider diversifying into other investments?

    Best Regards,

    • says

      luckydog17,

      Your thoughts are pretty much correct. Once I have 50 positions then I’ll continue reinvesting back into the companies that have the best valuations while also keeping an eye on weighting. Valuation takes precedent over weighting for me, because weighting is something I can control and change. However, I can’t change valuation.

      And I absolutely plan to diversify outside of my equity portfolio when the time makes sense. Maybe that’s a year from now, or maybe it’s 10. I’m not sure. But when interest rates are significantly higher than here I hope to eventually invest in a little fixed income. I don’t want it to be a large part of my portfolio because equities are simply the greatest asset class for the long haul, but fixed income could provide a nice boost to my income if done right. If I could invest in some long-term bonds north of 6% as I close in on financial independence I wouldn’t be opposed. However, that 6% isn’t nearly as attractive at 6% in a dividend growth stock because inflation will slowly eat away at the coupon, as well as the principle. The nature of the beast.

      Real estate is also something that might be in the mix, beyond just REITs. I’d love to own a nice property in a highly desirable location one day. For instance, I’ve always wanted to own a small loft in a popular downtown area, but my frugality has not allowed that yet. However, the right property at the right price might make sense one day. We’ll see.

      Thanks for stopping by!

      Best wishes.

  22. says

    Hey DM,

    Great Post! I particularly loved the analogy with the castle and the marauders. I am aiming to also own a large group of holdings to add precisely that security where a single company’s dividend holds only around or less than 5% of the total income.

    The market has been rising and some of the companies were previously trading at a low valuations are rising aggressively. It’s getting harder and harder to find good value at good price. Almost all the companies you listed are also on my watchlist.

    I managed to get Unilever at a great price but was sad that it shoot up further before I could load up on more shares. Colgate never seems to come down from their high valuation and General Mills just shoot up. Meanwhile, same thing happens for Jonhson and Jonhson and idustrials like Illinois Tools Works. This month I will be adding to my safety cash reserves, so I’m hoping for a small drop on May.

    Cheers,
    DividendVenture

    • says

      DV,

      Thanks! Glad you liked that analogy. That’s exactly how I feel whenever I think about income safety: Marauders trying to take my freedom the instant they smell weakness.

      Great job getting in on UL. I’ve been sitting here writing about it for months and kept missing out. So many stocks, so little capital. The curse of the little guy. :)

      Hopefully we get some more attractive prices here soon, although I don’t know how much capital I’m going to have here in the short term as I contemplate some changes in my personal life.

      Take care!

      • Jerry says

        I feel you on missing UL. I’ve been eyeing it for months and was set to make a purchase, but with the recent gain I’m still on the sidelines. Same with NSRGY (Nestle) I wanted to get in before the annual ex-div date April 14th I believe, but It has also taken off in the last couple weeks. I picked up a little MA in the meantime.

        • says

          Jerry,

          Yeah, I was surprised to see the pop in UL shares. I knew there was a little value there, but not enough to warrant such a surge. But that’s what makes Mr. Market erratic: You never know what he’s going to do! :)

          And great job on MA. That particular stock doesn’t make a lot of sense for me personally, but it’s a fantastic company. I could kick myself for passing up on V a while ago.

          Take care.

  23. says

    General Mills, Inc. (GIS) Liking this one! could buy for around $48/share
    Nestle SA (NSRGY), Maybe! i need to do more homework for this one.
    Colgate-Palmolive Company (CL), Definitely buying, but only for reasonable valuation. You’ll get your change.
    Automatic Data Processing (ADP) First look.. hard to understand..Need’s more study + it’s tech? :(
    Unilever Plc (UL), Loving.. but quite big increase recent. +11.50% for me since Feb, maybe drop or not, soon ?
    The Clorox Co. (CLX). Like this one too, damn i need more money to buy these.

    Maybe a wild one get some Muenchener Rueckversicherungs-Ges. AG | Munich Reinsurance Company | ticker: MUV2 (Xetra) | dividend yield: 4,56% |
    You will never guess who is major owner of this company.. :) well who likes insurances?
    Core Shareholdings: 11.2%
    11.2% of the share capital are attributable to Warren E. Buffett and are held by several companies of his group (Berkshire Hathaway Inc., OBH Inc., National Indemnity Co.). According to the notification dated 15.10.2010 the investment serves the purpose of making trading profits and not of implementing strategic objectives.
    (Status as at 31.12.2012)

    You can always buy more Coke..

    cheerios!

    • says

      investingidiot,

      Can’t blame Buffett for liking insurance. It’s been very good to him. :)

      Although, I don’t think I can buy a piece of Munich Re here in the US, because there are no ADR shares. Am I not correct on that?

      Best regards!

      • says

        Muenchener Rueckversicherungs-Ges.AG-ADR (OTCMKTS:MURGY) Ratio DR:ORD 10-1

        Looks about right. But it seems i cant find any info on munichre website about this ADR so you may wanna contact them before purchase.
        http://www.munichre.com/en/ir/service/contact/private-investors/index.html

        if your broker does not offer OTC market trading directly, in some cases you can call them to make the purchase, but the transaction fee is usually higher, and there could be some fee for holding OTC stocks or ADRs. At least that’s what my broker told me when i asked about OTC and ADR purchases but it varies. So consult your broker.

        In some cases, its just more easier to use different broker to invest through continents and different currencies, so if you planning venture to Europe, i could recommend to do this.

  24. Colin says

    I am with you @doneby forty. Nothing screams diversification like owning pretty much every publicly traded comapny int he western world. And my index portfolio fo ~ $160K has generated $1600 in dividends and distribution through the first quarter. Best of both worlds.

  25. says

    DM,

    I’m with you on having a lot of diversification. Many of today’s titans can quickly become tomorrow’s dinosaurs especially with the speed which technology now travels. PG, Coke, and JNJ, and Exxon seem to be bullet proof today, but then again so did Sears, Kodak, GM, and Citibank twenty years ago.

    • says

      DP,

      I couldn’t agree more. While I’m huge fans of companies like PG and Coke, there’s no way to say for certain that they’ll always be titans of their respective industries. I put my money where my mouth is, and that’s why I invest my hard earned capital with these companies. However, it’s because I remain a tad leery that I diversify and reduce risk as much as possible.

      Thanks for adding that great point.

      Take care.

  26. says

    I have 38 Canadian stocks and 16 US stocks now. Currently, I am in progress to buy more US stocks to diversify my portfolio wisely. As you said, having 50 different high quality stocks will reduce the risk than having 20 stocks.

    • says

      S Arun,

      Nice! At 54 stocks that’s a very large portfolio. Glad to hear you take diversification and risk reduction seriously.

      It’ll be a little while before I get to that number, but I’m definitely looking forward to it! :)

      Take care.

  27. ToughMother says

    I’m at 26 dividend stocks right now. My newest bouncing baby divvy UL which I picked up when it dipped below $40 recently. There are some other fabulous stocks I’ve been eyeing for a while, but most seem a little spendy to me right now. I’ve got a couple of stocks to trim of the 26, but I’m probably looking at the 40 ballpark eventually…

    Speaking of value, here’s something I struggle with: I have some good stocks and would like to buy more shares but the current price, while appropriately valued (or even a bit on sale) for RIGHT NOW is more than what I paid for my first or second purchase of that stock. So, I end up having trouble pulling the trigger given the price increase. Anyone else with that psychological barrier? If not, how do you frame it for yourself? I know… I know… it’s about the income stream, but I LOVE buying things ON SALE.

    ToughMother

    • Jerry says

      ToughMother, I have the same exact issue. I would love to hear DM’s thoughts. It is definitely a psychological thing. This would be a great post for DM to talk about

    • says

      ToughMother,

      That’s a great question there in regards to valuation.

      I always value a stock based on today’s fundamentals. It’s easy to say “but PEP was available for $70/share at the end of 2012.” Of course, the dividend was only $0.5375 per share back then vs.$0.655 per share as it is now, and EPS was $3.92 for 2012 vs. $4.32 as it is now. So you have some P/E ratio expansion there, but the numbers support some of the advancement as well.

      In the end, I try to think for the long term. And I think like an owner. It’s about equity and income, not getting the absolute rock bottom price. Valuation is paramount to be sure, but it shouldn’t handcuff you. If the valuation is reasonable and there appears to be a margin of safety then I’m likely to buy. I never recommend overpaying, but I wouldn’t use past stock prices for current purchase decisions.

      Cheers!

      • Jerry says

        okay I get that. So let’s take JNJ right now at the moment. If you didn’t own it would you buy NOW even though it’s not really good valuation today (my opinion) but probably will be 5 years from now?

        • says

          Jerry,

          I wouldn’t be interested in JNJ at $98/share. It’s a tad expensive, in my opinion. Could an investor do worse than buy JNJ here? Absolutely. However, I think better values exist in the market, and that’s where I’ve been putting my capital.

          Every investment competes with every other available investment in the universe. As such, limited capital must be allocated as intelligently as possible. While JNJ isn’t a horrible deal in itself, because better deals currently exist I’d invest elsewhere.

          And JNJ may very well be pried higher five years from now, but valuation is still extremely important. I wouldn’t encourage overpaying simply because the equity may be worth more in the future. The market may overprice equity for a while, but if that discontinues I’d rather be a buyer than a worried owner.

          I hope this answer helps!

          Best wishes.

        • ToughMother says

          Ahh, JNJ. Great example. I bought some at $65 right before it took off. It’s price currently doesn’t meet any on-sale valuation criteria that I have, but if it did, I’d still be struggling…

          However, I do appreciate DM’s good points about current divvy yield and EPS. I’ll be sure to line up those metrics from time of prior purchase/s and those of possible current purchases in my spreadsheets to help me better frame my considerations…

          Thanks to others and their feedback! Glad I’m not alone in this particular struggle. Ah, behavioral economics are a bear!

      • says

        Great article Jason,

        I can’t wait until the day you’re able to manage your huge portfolio full time :)

        I like ToughMother’s great question about the psychology of adding to a position that keeps going up in price. One way I like to look at it is that the market and good companies in it are suppose to always be going up in price as they grow bigger and bigger and time goes on. This helps me keep an open mind to keep adding as long as the valuation makes sense.

        Thanks for the fun read and conversation!

        • says

          Ryan,

          Thanks for the support! And I also cannot wait for the day I can manage my portfolio full time. I know that day is still a ways off, but I’m stoked. :)

          And I fully agree with you on stock prices. It’s a good thing that stock prices are going up, as long as they’re backed by improving fundamentals. It means everything is working as it should. To see a high-quality company continue to increase revenue, earnings, and dividends, and then expect the stock price to stagnate for years is wishful. While I appreciate a great deal, I also would be surprised to be able to load up on shares for years on end for the same price. Again, it all depends on business performance for me. In a perfect world, the stock price would simply be a function of the business’s performance, but, of course, we know that to be untrue. I simply try to not let stock prices bully me.

          Best wishes.

  28. says

    Hi Jason, nice post! I like the way you see your stocks portfolio. We can feel that you are truly passionate about it. Each of your stocks is like a little war cash machine and by adding them up you end up having a strong army to defend your financial freedom!

    Every school seems to have its theory about diversification. Too many stocks and you’d be better off buying an index fund ( and not get the dividends…) And not enough stocks and you’re too much at risk. Some say that 10 well chosen stocks can give you an 80% diversification and others say it’s 20 or 30 while some say that a 50 stocks portefolio is not manageable without an army of analysts.

    Even Warren Buffet, in one of his letters to shareholders said that he prefers concentration over diversification. But, even though he has a lot of money invested in its “big four” he still owns over 40 stocks plus all the companies he bought under his holding of Berkshire Hathaway.

    In the end, I really like your explanations. Simply hold whatever number of stocks that makes you feel confortable and secure and that you think you can manage with diligence.

    I for myself feel that I will build a 30-50 stocks portfolio over the long term (I only have 4 stocks as of now… Ouff ). But, if after that I think that there is a great opportunity at a wonderful price then why would I let it pass? Anyways, over 10-20-30 years, like someone mentionned previously, some of your stocks will lag and you might have to sell them before they become another Kodak…

    On another topic, I also saw that many people here are talking about diversification in real estate. While I know that real estate can be a great wealth builder, I also know it can be a great wealth destructor. I have been working in real estate and insurance quite a bit and even though I heard some great stories, I have also heard a huge lot of bad stories too. You have to know what you’re doing with those buildings…

    Real estate is not a passive investment. It’s a business with customers and a building always needs capex to maintain its integrity. You can have good and bad customers like with any other businesses. Bad customers can greatly put you at risk. Bad buildings can ruin you in a very short time…

    When you buy for two thousands or even ten thousands worth of stocks you can loose your initial capital. It’s sad but it’s over. But when you buy a 500000$ property with a 100000$ cashdown, you don’t just risk 100k, you risk also 400k that you don’t own. And even though you did all the due diligence you could do ( soil test, inspection etc) you can pick a property that was in fact a bad purchase (foundation problem, hidden soil problems that will cost you 100k or more in maintenance…) If you don’t have enough equity, you might end up being stuck in a dangerous position – unable to refinance to do the repairs and unable to sell at a price that would cover your mortgage loan – You’ll lose a lot more than 2000$ and maybe even your health…One bad purchase can make all your retirement at risk and I saw hundreds of stories like that in a couple of years in the field. Yeah you can try to sue but it costs a lot and lawyers end up making a lot of money… But not you.

    With the market pressure, builders tend to build faster and with less quality. Flipping as fast as possible is the new trend now. Build fast, sell fast, start another project.

    Bad building are called alligators… They make you sink and they eat you slowly but surely! New constructions as long as old one can be affected by great problems that you won’t discover with a traditional inspection and house insurance does not cover hidden construction or soil problems. Contractors often simply shut down the companies after every project and start under another name so you’ll have no one to sue… They simply don’t exist anymore… So good luck!

    And there is also a new trend here in Canada. People don’t pay their rent for a couple of months until you finally are legally able to throw them out. And then, when they know they have to leave, one night, they destroy the entire appartment and open the sink before leaving the premises and disappearing in the wild! Leaving you with 50000$ dollars worth in damages…

    So I guess real estate is not for me! I’ve heard too many bad stories vs not so many good ones… Money is too hard to save to put it in a single big investment like that. My single family dwelling is enough and already takes a lot of my income and free time to renovate :) I prefer dividend stocks!

    Anyways…

    Jason, how many hours do you devote per week/month at taking care of your portfolio? Do you reanalyze the dividend growth potential of all of your stocks every quarter, every year?

    Thanks

    • Ravi says

      The reason Buffett says he prefers concentration is because Berkshire is not an index fund, it is basically a hedge fund. He is not trying to outperform on cash flows, he has to perform on book value (total return).

      In our situations, investing in 25, 50, or even 100 holdings is not a bad thing, it simply means that your chances of outperforming (say, an index) will get slimmer. HOWEVER, since we are trying to generate cash flow machines our objective is different than Buffett, and most other investors who are looking more for total return.

      Each additional stock reduces overall portfolio volatility, but a good value is always a good value.

      Who knows, if DM starts to outperform benchmarks over the next decade, maybe he should launch a fund with Einhorn? :)

    • says

      Allan,

      Thanks for sharing that. And believe me, you’re preaching to the choir! I have no desire to ever be a landlord. I don’t even own my own residence yet. I’ve always been leery when it comes to real estate. Real estate has historically been a very mediocre investment, while equities have been outstanding. That’s why I rent the former and own the latter. :)

      As far as managing my portfolio goes, it varies from week to week. Sometimes I’m quite active with it, especially if I have capital around to buy stocks. Other times, I’m rather sedentary and go days without even checking the balance. It all depends. I would guess that I probably spend 10 hours or so per week on average. It’s hard to say for sure. Maybe I’ll clock myself sometime and get an accurate picture.

      Cheers!

  29. says

    When you reach 50 positions, may will be the time to make a 1 year sabatical and DRIP, buy some dividend paying etf (1 for stocks and 1 for bonds) and some non-paying dividend stocks (like BRK.B) that could boost your capital gains.
    The time you spend may be better consumed looking to growth your online income, I think. There are many opportunities in the US to do this.

    Anyway, nice blog and very nice goals you achieve every day

    • says

      Trader,

      Thank you very much. I’m proud of not just what I’ve done, but this entire community. We all rally around each other in a really unique way. It’s very inspiring! :)

      Your sabbatical idea isn’t too far from some ideas I’m bouncing around right now. I’ll be talking about that in the next month or so!

      And stocks that don’t pay dividends?! Blasphemy! :)

      Best wishes.

  30. says

    Ravi, yeah I understand that DGI are looking more into building many sources of growing income than focusing on total return alone. Beside getting some income protection with diversification which is already a great advantage on its own, it should also give a great total return, plus the fact that it’s fun, rewarding and that I prefer having control over my investment than relying on an unknown so-called professional…

    I really think it is a great strategy. But I also think that total returns has its importance. I wouldn’t like to see my portfolio greatly lag the compounding interest of an index fund because at the end of the day, what you get when you retire is a capital amount from which you are receiving dividends (3-4% of the market value of the shares). So if I would see my portfolio getting a 5-6% compounded total return while an index fund consistenly obtain a 10%-11% total return than I’d be better off getting better at investing or simply buying an index fund until I retire…

    Thanks

    • says

      Yes, but the whole point of the DGI strategy is so you never have to sell your stocks. In theory an index fund might return 10-11% a year, but when you need money, you have to sell your holdings every year in the fund. With DGI stocks, you don’t sell a penny of the principle.

      Not to mention the additional fees that you have to pay with index funds.

      But again, as most of us agree, you have to find what works for you…thats the most important part.

      For me, I envision having between 45-65 stocks once I reach retirement.

      As a side note….Jason/anyone else, any comments on Ensco (ESV)? I am thinking about pulling the trigger on this one shortly….seems to be one of the best values at the moment..

      • says

        Dan,

        Everyone here knows my thoughts on index funds. :)

        I just now took a quick look at ESV. I see a lot to like there. One note of caution, though: FCF does not cover the dividend, and hasn’t for quite a few years. At least according to data sourced from Morningstar. I don’t mind a bad year or two, or utilities with weak FCF that have virtually guaranteed revenue…but an energy company that sports a record like that is a bit worrisome. However, everything else looks very solid. The growth rate is robust and the debt load is very low.

        Best of luck if you invest!

        Take care.

  31. says

    Since the level of diversification is a continuum, almost any particular number can be argued as appropriate. 50 does seem reasonable to me. I do think sector diversification is important, however. It appears to me that you’re already reasonably well diversified across sectors even if that was not entirely deliberate. The reason I feel that’s important is that when the cuts eventually come, they are usually clustered in a particular problem sector, which hopefully one is not concentrated in at the time. Continued best wishes for your growing portfolio.

    • says

      S.B.,

      I agree. We found this to be the case when the Great Recession hit and many banks cut or eliminated dividends pretty much across the board. This time it was financial institutions, but there’s no reason to think that all other sectors are safe from such an event in the future. Perhaps next time it will be miners, or industrial companies, or some other sector. Who knows? The thing to remember is that we don’t know, so diversification remains extremely important.

      Best regards.

  32. says

    This made me think of this:
    Here is the speech of William Wallace from “Braveheart”:

    “I am William Wallace (DividendMantra). And I see a whole army of my countrymen (readers),
    here in defiance of tyranny! You have come to fight as free men. And
    free man you are! What will you do without freedom? Will you fight?”
    “Two thousand (bills) against ten (savings/investing)?” – the veteran shouted. “No! We will
    run – and live!”
    “Yes!” Wallace shouted back. “Fight and you may die. Run and you
    will live at least awhile [in poverty]. And dying in your bed many years from now [job loss],
    would you be willing to trade all the days from this day to that for
    one chance, just one chance, to come back here as young men and tell
    our enemies that they may take our lives [jobs] but they will never take
    our freedom!”

    • says

      dividendfun,

      Wow, that’s awesome! Thanks so much for sharing that, man. I really appreciate that! :)

      I know that I’m nowhere near William Wallace on the inspirational/warrior scale, but I hope to inspire and educate in my own little way. The upside is that I won’t have to worry about my limbs being torn from my body, so there’s that!

      Thanks again for typing that up. Very awesome comment!

      Best wishes.

  33. Colin says

    Sorry should have been ~190K portfolio of index funds generating $1600 for a 0.8% yield/quarter. 3.2% per year for a balanced portfolio including bond, REIT, Preffered Share, Canadian, US, Global Indexes. A lot of yield from bonds, REITS and preferred, but the Canadian index also generates 2.5% annual yield. Not the route to Dividend investing riches, I suppose, but a nice side effect of a growth focussed portfolio.

  34. says

    Can’t agree more with Jason’s diversification of portfolio idea. In fact, proper diversification of stock portfolio is the sign of a prudent investor. the right approach is to hedge the risk of being too bullish on a single stock. In that case when the stock slides, our prospect of earning also misses the expectation. However, when the portfolio is properly balanced with more than one stock (I prefer to manage 15 stocks rather than 50; I’m planning to get a crash course on managing 50 something stocks from Jason ;) ). Another thing I have understood while investing is the fact that never become a short sighted investor and always have a long term investment approach to reap most benefit from the market as long run investment smooths out the short term fluctuations. Great blog post indeed Jason. Thanks for coming up with such a nice post.

    • says

      Fionna,

      Thanks for the very sweet comment. I’m glad you enjoyed the post.

      And I couldn’t agree more in regards to maintaining a long-term investment horizon. Worrying about a quarter here or even a year there doesn’t mean much when you’re interested in what a company might be doing decades from now.

      Thanks for stopping by!

      Best wishes.

  35. says

    Jason:
    I’m within 12 to 24 months of calling it a career. I didn’t get into dividend growth investing until 2011 and I moved slowly at that. I’m up to 22 stocks. The top holding has a 9.5% allocation (JNJ) and the smallest is 1.7% (TGT). JNJ just kind of grew itself into the top spot and is also my oldest holding (since 2006). I can’t bring myself to sell any JNJ, but my goal is to get it down to 5%. I plan to do that by adding to other holdings over time.

    As others have mentioned, finding something to buy is the problem. With a plan to eventually cap everything at a 5% allocation I could theoretically have a 20 stock portfolio. I’ll likely end up settling in somewhere between 25 and 30 though.

    I admire your energy in wanting to keep track of 50 holdings. I have doubts about my ability to monitor even 30 stocks. I have yet to establish a solid routine for monitoring each stock. I’m working on that aspect of it. I was curious how you do it. Do you evaluate each quarter, when earnings and dividends are announced?

    • says

      Steve,

      Congrats on being close to retirement. And congrats for positioning yourself so well! :)

      As far as how I monitor it, I do it a few different ways. First, I track my portfolio over at Seeking Alpha and I have it set up so that I get emails whenever there is news to be read. Second, I manually run through some things every weekend. I’ll check over a few companies and see if there’s anything going on. Third, the reason why I’ve constructed my portfolio the way I have is so that there isn’t a lot of needless and constant monitoring going on. I mean I’m invested in Procter & Gamble and Coke because I know they’re great at doing what they do, and they’re going to go out and make a lot of money doing it. Then they’re going to send me some of that profit via dividends. So how much you need to monitor your holdings is somewhat a function of the type of companies you’re invested in.

      I hope this helps! Congrats again! :)

      Take care.

  36. Daniel says

    Hi Jason,

    I love you blog, been reading it for a while now. I’m of a similar age and in a similar investing position as you, and I share your goal of achieving financial independence with dividend income before the age of 40.

    I agree about the importance of diversification, absolutely. I think 50 is probably a really good number. However the comment above about Warren Buffet got me thinking… As a fun thought experiment, what would your portfolio look like if you could only choose the absolute cream of the crop. That is to say, if you could only have six positions, what would they be? What would your all-star minimalist portfolio look like?

    I chose six because I think I remember Warren once saying that you will only ever have six truly great ideas in your life. So what six positions from you portfolio would you pick, if you were hypothetically forced to? I think this is a fun question, because it forces us to really think about the companies we love the most. It also makes us take a hard look at what companies are we really banking on being around and prospering over 20 years from now.

    Of course, like you mentioned above, we are not all geniuses like Buffet. Most of us should be diversified to the tune of 20-50 positions.

    Anyway, great blog Jason, I’d love to hear your answer to the above. (Personally, I am having a hard time narrowing it down. I’ve only decided for sure that Realty Income (O) deserves the honor of the REIT slot in my super six, if I decide I want a REIT in there.)

    What do you think? Who are your super six?

    • says

      Daniel,

      Thanks for following along! I sincerely appreciate your readership. And I’m glad we’re in the same boat, because I’d like to think it’s a pretty good boat to be in. :)

      As far as your question goes, it’s tough to narrow it down to just six. What you see below is my best attempt:

      Coca-Cola
      PepsiCo
      Johnson & Johnson
      Exxon Mobil
      Colgate-Palmolive
      Philip Morris International

      That’s probably the best I can do, and it’s in no particular order. However, that list could easily change a year or more down the line as my opinion changes or as certain forces change these companies. CL is the only one I don’t yet own, but I very much want to.

      Best of luck as you continue to march toward freedom. I’ll be right there with you! :)

      Cheers.

  37. says

    I like your ways and your decision that you had regarding investment in stock market. I think everyone should invest in stock market after preparing a strategy about UK dividends and choose only such stock that can offer high yield value on UK dividends.

    • says

      best uk dividend stocks,

      I think equities are by far the best asset class over the long haul. However, I can also see where some people just don’t have the stomach or mind for it. Luckily, I really enjoy investing and researching companies. If I didn’t enjoy all of this I’d still buy stocks, but through a few index funds and be done with it.

      Cheers!

  38. says

    Hello Jason –

    These articles are great. One question (which may be covered in a different section of your blog) is how has the number of companies you invested in evolved over time? For example, one of your previous posts noted you started your freedom fund with $10,000. How many companies did you purchase with this $10,000 amount and what factor(s) influenced your decision to buy these initial companies vs. others you acquired as your portfolio grew?

    • says

      nuggetnumerouno,

      Thanks for stopping by!

      As far as your question goes, I’ve always tried to purchase in lots of at least $1,000. And you can see the size of the purchases gradually increase as time has passed. For instance, you can easily go back and see all of my purchases and the portfolio from three years ago. When I first started investing with my initial $5k, I was targeting at least $1,000. However, I did occasionally purchase stock for less money when that’s all I had. For instance, my purchase of Sysco stock was a little more than $800 because that’s all I could cobble together one month. And you can see that on my portfolio page, as my original cost basis is the original purchase amount (plus commission).

      I hope this helps.

      Cheers!

  39. Adam says

    Great article, Jason. Solid justification for the size of your FF.

    Was wondering… as you make a slow shift from seeking new companies to add to your portfolio to now monitoring your ~50 holdings, do you have a system for how you’re going to identify if/when a company should be sold out of portfolio?

    My line of work is process improvement and one of the criteria we use in assessing risks (aside from the impact and frequency of a potential failure) is our ability to DETECT a failure.

    Obviously you’re going to track dividends (and increases), but that is somewhat of a lagging measure which isn’t ideal. Do you have a spreadsheet to track leading measures taken from quarterly financial statements that would alert you to some trouble down the road? (so you can potentially get out and invest in other Freedom-Fund-worthy companies, before it’s too late) Stuff like tracking the payout ratio, some of the debt ratios, etc…

    If you do I’d love to hear your system, could be a good idea for a future article :) I would bookmark it right along your ‘how I analyze the value of a stock’.

    Cheers!

    • says

      Adam,

      That’s a great question there on tracking leading indicators. I would only advise you that there’s no science to this. We all have different ways to go about doing this, and while I’d like to say I’ll be able to predict a dividend cut before it happens with some frequency (like I did with TEF a while back), it’s honestly unlikely. I’ll do my best to monitor my companies, and what I’m looking for is quarterly earnings reports and management commentary. For instance, I sold out of INTC in two lots because I felt the dividend increases weren’t coming. Management had said nothing, and their self-imposed payout ratio was already maxed out. I sold my first batch hoping something would change and continued to monitor. The second batch came after it was obvious no dividend increase was coming down the pipeline anytime soon. There’s no “system” I have per se, but rather I just keep an eye out for any big news that may affect a company’s ability to continue paying/raising the dividend. Now, I don’t pay much attention to big macro news that affects the entire economy because much of this is just noise, but major company-specific problems like BP’s oil spill, Intel’s miss on the mobile movement, or TEF’s inability to manage debt appropriately in the face of high unemployment and layoff costs in Spain are all indicators to me that something might be amiss. However, how you act with that information is all up to you. Many investors wait until a dividend is actually cut. That is obviously a lagging indicator as you mention, but you have to remember that if you’re invested with a company for 5-10 years or more you’re looking at a pretty significant decision to just sell on a whim. I’m not saying you should become emotionally attached, but at the same time you don’t want to become emotional about selling either and sell just because the current news isn’t favorable. Ignoring the noise and getting to the meat of the situation is hard to do, but necessary.

      Again, I don’t have a system. I look at every company individually because they’re all individual companies with different operations. I do my best to manage risk and monitor potential changes and discuss them here on the blog. And sometimes managing your risk is all you can really do. We’ll all make mistakes from time to time, and it’s likely I’ll be caught by surprise at some point. It’s best just to try and learn as much as possible from these events and use that experience moving forward.

      I hope that helps?

      Best wishes!

  40. says

    Thanks for sharing your strategy. I am just starting my dividend portfolio and I am still working my strategy. I have about 8 stocks so far. I also have an index fund and an overseas fund. I am working a valuation strategy for dividend stocks and I have about 10 more companies I am targeting as soon as valuations and my future contributions allow.

    Keep up the good work.

    • says

      grt9918,

      Congrats on starting your own journey. Eight stocks is the beginning of something really wonderful. The portfolio can progress quicker than you might think. Keep it up! :)

      Cheers.

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