Asset Allocation by Sector As It Pertains To Dividend Growth Investing

piechart asset allocation by sectorAsset allocation by sector is an aspect of the dividend growth investing strategy that I’ve been meaning to discuss for some time now.

But now that I have some time to sit down and really address this, I hope it provides you readers a ton of value.

I brought this subject up very quickly when I reviewed Personal Capital a few months ago, but I didn’t really go any further than just casually mentioning my “ideal” allocation to sectors within my own portfolio over the long term. So I’m going to take some time today to flesh that ideal allocation out, what sectors you might want to strongly look at, and how to think about sector allocation as it relates to building out your portfolio.

Asset Allocation by Sector

When I look at or think about sectors, I automatically default to the Global Industry Classification Standard.

The GICS consists of 10 major sectors, which I’ll list below:

  • Energy
  • Materials
  • Industrials
  • Consumer Discretionary
  • Consumer Staples
  • Health Care
  • Financials
  • Information Technology
  • Telecommunication Services
  • Utilities

Those 10 sectors represent the entirety of the economy at a high level. Every single stock you look at will fit into one of those sectors. There are various industry groups, industries, and sub-industries that break it down further, but those major sectors will pretty much tell you all you need to know as far as targeting certain stocks or certain sectors in terms of weightings as it suits your goals and/or needs.

The Importance Of Sector Allocation

I think it’s important before we proceed to first ask whether or not it’s even that important to think about sector allocation. And if it’s important, how important?

I can tell you that I personally only loosely follow a sector allocation strategy. There are some sectors that I almost constantly avoid no matter what, like Utilities. And that’s simply because I’m not a big fan of the dynamics, regulation, or economics of utility companies in general.

And then there are sectors that I’ll avoid only when I think I’m too highly allocated there. Again, I’m pretty loose with this. I don’t follow strict percentages down to an exact number. But if I feel comfortable with about 10% of my assets in energy, I start to get uncomfortable when I’m significantly off target.

But I will quickly note here that I didn’t even really pay much attention to this until my portfolio was hitting somewhere around $100,000 in market value. If you start overly concerning yourself with something like sector allocation too early on, you’ll really be doing yourself a disservice.

Imagine you have a portfolio valued at $25,000. One stock purchase of, say, $1,500 creates a swing of 6% right there. You’ll end up driving yourself nuts trying to make sure the puzzle stays together even while you’re actively adding major pieces along the way. Besides, the puzzle won’t even really start to form a picture until it’s crossed over into six figures, in my opinion.

And if you’re too strongly following a sector allocation strategy, you’ll very likely end up letting the tail wag the dog by trying to make sure your portfolio is fitting into preconceived numbers, even if valuations prohibit certain purchases. If, for instance, you want to have a weighting of 5% to energy, you might end up chasing stocks in that sector when you find yourself underweight, possibly ignoring valuations in that sector and/or opportunities elsewhere that might actually be better at the time.

In addition, your portfolio is changing and growing with every subsequent stock purchase. It’s evolving, for the better, hopefully. So what your sector allocation might look like today won’t likely be the same a year or two from now if you’re still actively and aggressively accumulating assets that are high in quality and at attractive valuations.

Not only that, but you’ll likely change as an investor as you go along. I’m certainly not the same investor I was when my portfolio was 10% its current size. So constantly stressing yourself out about sector allocation numbers will likely be a fruitless exercise unless your portfolio and you are both already fairly mature.

I think sector allocation as it pertains to dividend growth investing should be thought of in terms of maximizing dividend safety and dividend growth, while at the same time reducing risk of (temporary or permanent) income loss. Every single investment I make and general strategy I follow is with all of that in mind: Is my income sustainable? Is my income growing at an attractive rate? Will it likely continue growing? Is my income at risk of being reduced?

I invest in the highest-quality companies I can find in order to reduce the risk of income loss in the form of a dividend cut or elimination, and then I diversify broadly to mitigate the effects if such an event were to occur.

But I also think about sector allocation in terms of reducing risk of dividend income loss and mitigating those effects as much as possible.

Sector Allocation For A Dividend Growth Investor

As such, I think there are certain sectors that are just more attractive for a dividend growth investor.

For instance, the largest single sector that’s represented in my portfolio is Consumer Staples. These are companies that sell products and/or services that people all over the world tend to buy no matter what’s going on with the economy. Think stocks like Philip Morris International (PM)The Coca-Cola Co. (KO), and Wal-Mart Stores, Inc. (WMT).

I happen to believe that a dividend growth investor would probably find themselves most interested in this sector and would thus have a substantial allocation to these kinds of stocks.

There’s good reason for that.

These are companies that are visible. You see their products and/or services almost everywhere you look. It’s unlikely you’ll be able to visit a major city in the US without running into a Walmart store. And try to go into any grocery store and not find Coca-Cola products. Since they’re visible, they’re also tangible. It’s easy to actually see your investment at work. You can drink a bottle of Dasani water and actually feel good about your KO stock. It makes investing tangible, real, and accessible.

In addition, these tend to be recession-proof products and/or services. People aren’t going to stop shopping for groceries and other household goods just because the economy is in poor condition. Likewise, consumers are unlikely to stop consuming certain products, like toilet paper and toothpaste, no matter what’s going on with Europe, the presidential race, or interest rates.

And then, of course, these are typically branded products and/or services, brands which impart competitive advantages. That brand equity and awareness translates into an ability to raise prices over time, increase profitability, and create an increasingly large and loyal army of consumers.

So you can look at David Fish’s Dividend Champions, Contenders, and Challengers list to find the more than 700 US-listed stocks that all sport at least five consecutive years of dividend raises.

And what you’ll notice when you scan that list is that a lot of the high-quality branded consumer products and/or services companies tend to have very lengthy and reliable dividend streaks. KO, for instance, has increased their dividend for the past 53 consecutive years. That’s more than five straight decades!

Moreover, their results tend to be fairly even across long periods of time, oscillating much less than cyclical companies. Their growth tends to be stable and secular, which allows for someone living off of their dividend income to stay relatively calm even when the economic current becomes turbulent.

These types of companies are able to stand the test of time because their products and/or services tend to be ubiquitous. And they’re ubiquitous because consumers and/or other businesses demand them. The supply meets that demand, profits follow, and then these companies end up with so much profit that they start sending healthy checks to shareholders.

I also tend to favor the Financials, Industrials, and Health Care sectors. You’ll find incredible companies in these sectors that provide absolutely necessary or certainly in-demand products and/or services. Think companies like Johnson & Johnson (JNJ), Aflac Incorporated (AFL), and General Electric Company (GE). Some of the longest dividend growth streaks around can be found in stocks that hail from these three sectors.

The Health Care sector in particular is pretty attractive. The world is growing older, richer, and bigger, all of which foreshadow increased spending on healthcare in general.

Now, just like there are certain sectors that I as a dividend growth investor tend to favor, there are likewise sectors that I tend to purposely lighten my exposure to.

Information Technology comes to mind first. Technology changes rapidly. As such, it’s difficult to forecast exactly which companies are going to be dominant five years from now, let alone for the next 20 or 30 years. Thus, who’s to say which tech companies will be paying growing dividends for decades on end? Which technology will still be dominant decades from now? What’s going to change? What’s not going to change?

Because of the ever-present change in tech, you’ll notice that relatively few companies from the Information Technology sector are represented on Mr. Fish’s list. So I tend to purposely keep a light weighting to that sector. Not only due to the lack of lengthy dividend growth track records, but also due to my circle of competence not all that often encompassing tech stocks due to what is sometimes technology that’s hard to understand. If I can’t quickly and easily understand how a company makes money and will continue making money for a long time to come, I’m moving on.

The Utilities sector is another that I remain barely exposed to. Although there are quite a few utilities with lengthy dividend growth streaks, a lot of these same companies tend to sport fairly low dividend growth rates. And that’s because their growth is constrained by geographical limitations and heavy regulation. In addition, I have a hard time imagining that there isn’t going to be a lot of change in that industry when looking out over the next couple decades. Aging infrastructure combined with renewable energy like solar becoming more accessible seems to spell trouble, in my view.

My Ideal Sector Allocation

So this is my “ideal” allocation to the GICS sectors:

  • 20% Consumer Staples
  • 20% Financials
  • 15% Health Care
  • 15% Industrials
  • 10% Energy
  • 10% Consumer Discretionary
  • 5% Telecommunication Services
  • 2.5% Materials
  • 2.5% Information Technology

Again, I don’t follow a hard line in the sand here. But that’s just a general rule of thumb for my portfolio when looking at it in terms of holistic construction and which areas of the broader economy I prefer.

I will note that looking at my portfolio right now shows a heavier allocation to the Energy sector than I’d really like; it’s currently over 15%. And that’s really just because I found compelling value in that sector over the past few years even while other stocks in other sectors ran up pretty quickly. Due to that overexposure, I’ve purposely been limiting my stock purchases there over the last few months. And I’ll likely continue to do so over the next year or so, unless I see an opportunity or two that simply cannot be passed up.

I’m also a bit heavy on Materials, at over 4.5%. Again, that’s due to me going after value when I saw it. And that speaks to my nature of not really sticking hard and fast to this general outline. I’m okay with veering a little left or right when opportunities present themselves, and I thought BHP Billiton PLC (BBL), after a significant drop that began last summer, became cheap enough in terms of its valuation for me to allocate a bit more capital than I had first planned on when looking at the stock and that sector.

One other sector I’m heavy on, though not admittedly concerned about, is Consumer Staples. My exposure there is well over 25%, which I’m okay with due to the attractive nature of that sector and the stocks within that sector as it relates to dividend growth and overall quality.

Sectors I’m currently light on include Health Care and Consumer Discretionary. I’m actively looking for opportunities to change this as I continue to build out the portfolio.

Seeing as how the portfolio will probably be valued at around $500,000 before I switch the dividends from reinvestment to paying bills, and it’s currently valued at just under $200,000, there’s still a lot of room for growth and change here. As such, I don’t really stress myself out too much over these numbers.

I will note that the Financials sector includes REITs. I’d like to see about half of my Financials sector exposure taken up by REITs. It’s an easy-to-understand business model where a company generally owns high-quality real estate in high-traffic areas that are specific and purposeful, and then tenants pay a healthy rental fee to use those properties.

It seems to me that some investors seem to fear the Financials sector, perhaps unjustifiably. The sector is a lot more than just big banks that got themselves into trouble during the financial crisis by doing things they shouldn’t have. You also have the aforementioned REITs, as well as insurance companies and smaller banks. If you look out across the universe of dividend growth stocks, you’ll find a lot of stocks with extremely robust dividend growth records that hail from these industries.

You’ll notice that I don’t have any proposed allocation to the Utilities sector. And that’s due to my unfavorable opinion of the entire industry. That unfavorable opinion is currently exacerbated by the lack of clear value in that sector right now, with many utilities trading well above their historical norms as investors chase yield in a low-rate environment. My exposure there will likely just be a rounding error over the long haul. It’s currently about 1%.

The S&P 500

I’ve noted before that I don’t compare my portfolio to the S&P 500. The S&P 500 really has nothing to do with my portfolio, its intentions, or my long-term goals. I really view the best and most relevant benchmark as myself, in terms how well I’m doing relative to the absolute best I can manage.

There are a lot of reasons to not compare your portfolio to the S&P 500 if you’re a dividend growth investor building out a portfolio of high-quality dividend growth stocks that can one day generate enough income to pay your bills and grow that income above the rate of inflation. The fact that the S&P 500 yields only 1.92% right now or perhaps the fact that the index doesn’t care about dividend growth should probably be obvious in terms of the lack of usefulness in comparisons.

Let’s add another reason.

Check out the S&P 500’s sector allocation (according to S&P Dow Jones Indices):

  • Information Technology – 19.9%
  • Financials – 16.1%
  • Health Care – 14.6%
  • Consumer Discretionary – 12.5%
  • Industrials – 10.3%
  • Consumer Staples – 9.5%
  • Energy – 8.5%
  • Materials – 3.2%
  • Utilities – 3%
  • Telecommunication Services – 2.3%

Notice something?

The S&P 500 has an almost 20% weighting to Information Technology. Now, maybe you do as well, or maybe you want to. But I can tell you that I’d much prefer my portfolio not allocated that strongly to that sector, and I’d venture a guess that most of you won’t, either. Since there are really so few tech companies that actually sport extremely lengthy dividend growth streaks with great prospects for continued dividend growth moving forward, you’d end up with major positions in just a few companies across the sector, and very likely extremely unbalanced across the rest of your portfolio.

Then there is the relatively light exposure to the Consumer Staples sector, which includes companies that I love owning, like Unilever PLC (UL)Procter & Gamble Co. (PG), and PepsiCo, Inc. (PEP).

So this is just another reason I don’t compare my portfolio to the S&P 500. Not only does the index really have nothing to do with me and my goals, but the sector allocation within the index is completely different from what I’d personally be comfortable with.

Conclusion

I hope this overview on sector allocation as it pertains to dividend growth investing helps you. Keep in mind that it probably makes sense to refrain from thinking too strongly about allocation until your portfolio is sizable enough to really warrant that kind of attention and focus. Keep in mind as well that your ideal allocation will very likely be different from my ideal allocation. My intentions here are to provide food for thought, which I hope helps you develop a plan for your own sector allocation strategy for your portfolio.

I think insofar as dividend growth investing is concerned, it probably makes sense as a general rule of thumb to be strongly tilted toward consumer stocks and perhaps less strongly tilted toward technology stocks. And my opinion results from the fact that there are far more of the former stocks in the dividend growth investing universe and far less of the latter, due in large part to the completely different industries and the business models therein. After all, when it comes to the point to where you’re living off of your dividend income, how comfortable would you be relying on the odds that people will continue drinking beverages and buying toilet paper for the next, say, twenty years? Now how comfortable would you be relying on the microchips that are popular today remaining so for the next couple decades?

Full Disclosure: Long all aforementioned securities.

What about you? How strongly do you consider sector allocation in terms of portfolio construction and management?

Thanks for reading.

Photo Credit: bplanet/FreeDigitalPhotos.net

Note: Affiliate link included.

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113 Comments

  1. Jason,

    Excellent write up on sectors. I fully agree, it is not something to get overly concerned about – so long as you are picking good quality stocks that pay you to be an owner, and pay more over time. I know my current allocations are not ideal, but I don’t ever expect them to be. It is the sense that my portfolio will be constantly growing and changing to snap up good deals that are present. At the same time I agree that financials, industrials, energy, healthcare, and especially consumer staples should represent the core holdings of a strong portfolio. However, I am a little more bullish on materials stocks, but that is just splitting hairs.

    Thanks for the good read,
    Gremlin

  2. Sector balance is something to be aware of I guess as you build your portfolio. I do however think Asset Allocation is possibly more important. When it comes to riding out the long term volatility of investing, it could be a rough ride with 100% equity – do you intend to introduce some bonds at some stage?

  3. Gremlin,

    Thanks for dropping by. Glad you enjoyed the article.

    I’ve had a number of readers contact me about this subject, especially over the last few months. So I figured it was about time to finally address it. But I definitely agree with you in that it’s not something to be overly concerned with, especially if you’re not already significantly far along in terms of building your portfolio out. I think I might take a hard look at it when the portfolio is nearing that point to where I’m no longer going to be actively adding assets, but I’ll probably only remain loosely interested until then. I also happen to think most investors will naturally allocate sectors fairly appropriately just based on personal interests and one’s circle of competence, and the fact that values tend to move from sector to sector over time.

    Cheers!

  4. I think an investor has the luxury of handling stock selection the way the general manager of a Super Bowl champion team approaches the NFL draft. If the team is well-staffed at all the positions, the GM doesn’t have to take a tight end or a linebacker in the first round; he can simply draft the best player available, no matter the position. When I have money to invest in stocks, I look for the best value available, and I don’t sweat the sectors too much. That said, I wouldn’t invest everything in just restaurants, for example.

  5. Jim,

    Right. I think the big caveat there is:

    “If the team is well-staffed at all the positions…”

    That’s really it. As long as you’re diversifying your portfolio all the way along, it’s unlikely that you’d be in a position to where your sector allocation is way out of whack. If you load the whole team up with wide receivers, however, then you may be setting yourself up for problems. Sector allocation is just another way to look at diversification.

    Most intelligent investors will naturally find a sector allocation mix that works for them without really even thinking about it. My portfolio evolved almost completely the same way, in a very organic manner. I really haven’t thought too much about sector allocation at all and have only been somewhat proactive recently in terms of scaling back on my energy buys. But that’s something that really just requires a quick scan of the portfolio – you’ll notice things might not look right there. And that’s why I don’t really look at percentages or anything, and I certainly don’t follow any hard line in the sand.

    Thanks for dropping by!

    Best regards.

  6. Pretty interesting on the information technology holding a 20%, this includes the S and P as a whole, without doing a manual calculation is there a sector allocation for dividend stocks in the S & P, would be curious to see the difference?

  7. Buffett loves utilities now, as many retirees. Of course you have regulation and slow growth, but earnings are stable whatever how turns the economy. I’m very surprised you don’t want to invest in such companies, many are Dividend Aristocrats.

  8. Thanks for the informative article Jason. I completely agree with your views on sector allocation. I’m just starting out so I haven’t been paying too much attention to my sector allocation, but my portfolios happen to follow your ideal allocation so far. There is one exception – I’m a bit tech heavy at the moment. That should even out soon though as I’ve purchased most of the tech companies that I’m interested in like AAPL and MSFT.

    Ken

  9. steven,

    Hmm, I’m not sure if a separate calculation exists like that. Though, the S&P 500 is market cap weighted, and you’ve got a lot of major companies (like Apple, Microsoft, and Google) that are in tech. So that throws the allocation off quite a bit. But either way, I think that illustrates why the S&P 500 is probably not an apt comparison tool for anyone who’s looking to build a stream of dividend income large enough and diverse enough to comfortably live off of.

    Thanks for stopping by!

    Cheers.

  10. Interesting points, DM. I didnt realize that you avoid Utilities in your portfolio. I have ended up selling individual stocks in my portfolio that were in utilities, but still hold an ETF to get some exposure in teh sector.

    Thanks for sharing
    R2R

  11. Eric,

    Well, there are certainly some redeeming qualities there. Stable revenue sources on the back of providing a necessary service is one of the most obvious. But I think when looking at the challenges in the industry compounded by extremely high current valuations, I’m quite comfortable looking elsewhere for opportunities. You also have to consider your age. Looking at the growth that many utilities exhibit, I’m okay with sacrificing some of that current yield for a better opportunity to grow my income and wealth over many decades.

    Best regards.

  12. Ken,

    Exactly. I was in the same boat as you for quite a while there. And even though my portfolio is starting to mature a bit now, I still don’t pay all that much attention to sector allocation on an ongoing basis. But I find it quite easy to take a look at the entire portfolio and quickly see where there may be some gaps there. Ultimately, however, I let the market bring the opportunities to me. If I’m short on a sector and there are no values there, then I’m going to move on and wait for better opportunities down the line. Unless you’re very close to living off of your dividend income, you’ll have many chances to close those gaps over time. 🙂

    Best wishes!

  13. I’m a follower of your blog but I have to disagree with you about not comparing your portfolio to the S&P 500. Aren’t you curious about how you’re doing against the index? I don’t mean in terms of dividends but in terms of total return.

    While I like the idea of a dividend strategy, I happen to invest in index funds myself. I know that your portfolio pays way more dividends than mine, but what counts is total return.

    I can sell shares of my S&P 500 fund to buy goods and services in the same way that you can with your dividends. I think you are doing a disservice to readers by not comparing your returns against a common index fund like the S&P. It is almost as if you have something to hide.

  14. R2R,

    Yeah, I have very little utility exposure. And I’ll most likely keep it that way for a while. If I have the choice between a global company selling a branded product that will likely stay in demand for many years to come and a utility that is bound by regulation and its own local geographical market, I’m going to choose the former most often. 🙂

    Thanks for dropping in!

    Best regards.

  15. Pete,

    You’re free to disagree. Everyone has to find a strategy that works for them. But I don’t personally find any value in comparing myself to an index that has little to do with what I’m aiming for. There are plenty of indexes and funds that outperform the S&P 500 over rather long periods of time. To compare yourself to just one index might also be a disservice. What if you find you’ve beaten the S&P 500 over the last five years but failed to beat 10 other indexes over the same period? Or what if you don’t beat the S&P 500 index over a long period of time, but you end up living off of your dividend income even quicker than you planned. Have you failed? I find all that comparison a real waste of time. I’ve already expounded on that quite a bit in the past, so I won’t waste any time doing so once again.

    If you find value in comparing yourself to others, regardless of the relevance to your goals, then go for it. But I personally don’t. 🙂

    Cheers!

  16. FFdividend,

    There are definitely some redeeming qualities there, but I find the cons probably outweigh the pros. And that’s exacerbated by the lack of value in the sector right now.

    If Coca-Cola wants to increase the price of their products, they do that. They don’t need to get government approval. Utilities, however, do need that approval. They’re really not in complete control of their own destiny. Makes sense from a consumer and regulatory standpoint, but probably not so attractive from an investor’s perspective.

    Best regards.

  17. Thanks for the link Jason – very interesting. I guess it is fair enough to ignore bonds in your 30s with many years in front of you – also you may be the type who is emotionally adapted to ride out the rollercoaster of the equities market.

    Just come back with another Buffett quotation which always sticks with me

    “A low-cost index tracker is going to beat a majority of the amateur-managed money or professionally managed money.” (Now we are off track – sorry!)

  18. I definitely monitor my secotr allocation, but like you I am very flexible with it. I am actually more like the S&P allocation than yours (lots of Apple stock). I think Personal Capital is a great tool to be able to clearly see your allocation, even across multiple trading accounts. I also avoid utilities and to some extent energy (very volatile).

  19. Great post as always.

    I agree that you probably should not care too much about sector allocation until your portfolio is a good size. I tried worrying about it early on but all it did was overly complicate the early process. I now sit on about 30 different companies and at this stage sector allocation is much more something I can–and do–practically think about.

    I think sector allocation for dividend investors can also change according to age. For instance, being in my mid-20s I am currently quite content to be fairly overweight in financial companies. However, over time I would expect this to drop from the top spot and perhaps even out of the top 3. Certainly I would expect the berakdown of the financial sector (which is very diverse) to change from how it stands for me now.

    Certainly consumer defensive/staples and utilities are critical constituents for any dividend portfolio. Consumer discretionary companies–although more cyclical–are also important but probably not the biggest constituent however. Healthcare is also an important one and one I am looking to build up myself currently.

    Thanks again for the thorough write up!

  20. Portfolio sector allocation is a very personal matter that reflects a person’s risk tolerance and general comfort level with an investment. This is why no two portfolios are ever exactly the same. Of course, weightings can always get out of balance which is why a look over must be done every now and then and like you I have no hard line in the sand regarding my sector allocations. That being said, I only tend to review my sector allocations about every two or three months just to see how things have changed over that time period. I find no need to look over my allocations any more than that.

  21. My post wasn’t meant to be snarky, so I hope I didn’t come across that way.

    Aren’t we all aiming for the same thing? (i.e. maximum number of dollars) Eventually, we all want the ability to live off our portfolio in one form or another.

    Sure, there are more index funds than the S&P 500, but the reason I bring that one up is because it seems to be the one that is often recommended by people like Buffett and Bogle; it is all encompassing of the US stock market.

    I think there is A LOT of value in comparing your returns to other mainstream forms of investing. I know we subscribe to different schools of thought, but indexing is probably the way to go for most investors.

  22. Jason – a great article, as always! I’ve been using a very similar dividend-focused approach for two decades now, starting in my mid twenties, and some of my Consumer Staples positions (PEP, KO, PG, MO) have grown to much larger positions than what “the experts” recommend in the so-called “ideal portfolio” – but so what? To quote the ingenious wordsmith JF, a.k.a. DM: “each one of these businesses is regularly raining cash upon me in the form of dividends. Not only that, but those dividends are growing by virtue of growth in the underlying businesses’ profits. So while it all started off as a drizzle, I can now say with some confidence that it’s turning into a full-fledged thunderstorm. And guess what? I don’t have an umbrella.” Well said, my friend! 🙂

    Wishing you a happy downpour and a gusher of dividends for years to come!

    Alex

  23. Vawt,

    I agree. Personal Capital has a really nice outlay. The visuals are great and it certainly allows you to get a nice, quick snapshot of your allocation. I continue to enjoy the service. 🙂

    Cheers!

  24. TDD,

    That’s a great point there. Thinking about sector allocation in terms of your age is something that’s probably pretty helpful. I’m kind of in a unique situation where I’m a hybrid young/old investor – I’m only 33 now, but I’m also investing for “retirement” in only seven years. As such, I think I’ve come up with an allocation model that works pretty good for both sides of the coin.

    I’m not necessarily all that concerned with the finance stocks, however. Like I mentioned, there’s a lot more than big banks there. And big banks themselves aren’t really even all that bad. Many of them have corporate history dating back more than a century, with some of the Canadian banks paying dividends for well over 100 years. But, again, you’ve got insurance and REITs there as well. One could actually have a significant exposure to Financials without any banks at all. And I don’t see a lot changing for the real estate or insurance industries when looking out over the next 10+ years.

    Thanks for dropping by!

    Best wishes.

  25. Hi Jason,

    I think like you that portfolio allocation becomes more important at some point but I wouldn’t pass over a quality dgi stock selling at a great price just to make sure my asset allocation is “secure”. I currently manage a 40k portfolio so I don’t really care about asset allocation in terms of industries for now. I’m just building the base. I guess it’s going to become more important later. But I’m already naturally diversifying my portfolio. By buying in small chunks every months or so and by seizing opportunities when they show up I guess most of the diversification will be done by itself plus I’m cost averaging too. Every quarter or year I follow how each company is doing and might occasionnaly do a clean-up which will also act as a security net. If there’s a dividend cut, at some point you’ll get rid of the stock. Huh?!

    Being diversified in Canada and US, across 30-50 companies some more or less cyclical, I guess that’s enough diversification. I wouldn’t go too crazy about it. Security has a price… that can become too expensive if we become too paranoid.

    For sure an entire industry could collapse like the oil industry or the financial industry and that’s why we want to be diversified and not put all our eggs in the same basket but usually even when an industry collapses not all the company in that industry are dying. Some can often use these though times to buy competitors and grow bigger. As dividend growth investors we love to invest in such companies. 🙂

    In the end diversification depends of the level of comfort and the importance of the income. I personaly plan to use dividend income as part of a bigger plan. I want to have other sources of income like online income and maybe a small business eventually. So asset allocation won’t need to be strict strict strict!

    Great post by the way.

    Take care

  26. DH,

    Yeah, I’m with you. I don’t even think I look at the allocation that often. Maybe every six moths? Maybe not even that often. Technology makes it easy to quickly pull your allocation, but I generally find it almost as suitable to just take a look at the portfolio and see if there are any gaps there.

    I think it might make sense to start to take a pretty good look at this allocation when you’re, say, 80% complete in terms of building your portfolio out, but the allocation will be on an ongoing process all the way through. And that’s part of the fun. 🙂

    Best regards.

  27. Pete,

    I didn’t take it as snarky. No apologies necessary.

    Like I said, we all must formulate strategies that work for us. If you find a lot of value in comparing yourself, then I say go for it. I just don’t find any value there at all. And I’ve been pretty clear in the past about why I don’t find value there.

    Cheers!

  28. AlexG,

    Ha! I remember writing that. Thanks for quoting me there. I feel pretty special now that I’m being quoted. 🙂

    Wishing you a very happy downpour for many years to come as well. And make sure you leave that umbrella at home.

    Best wishes.

  29. Allan,

    Definitely. I wouldn’t pass up a high-quality stock trading at a good price just for the sake of making sure my allocation followed some exact number. I think that’s akin to letting the tail wag the dog. And that’s kind of how I ended up with such a strong allocation to energy. I just kind of ignored the fact that I was going to heavy, knowing that I could always balance that out later with new purchases in other sectors.

    But everyone is different. The key is diversifying to a level you feel comfortable with. An that goes for asset allocation, the number of stocks in your portfolio, the types of stocks you buy, and your sector allocation. 🙂

    Thanks for dropping by and sharing!

    Best regards.

  30. Brilliant read Jason! More so because this has been this weeks “random area of interest” for me and I have been researching it for the past 4 or 5 days and getting slightly bewildered with all the information / advice / rules etc.

    Thankfully, your blog today, answered a lot of my questions and managed to wrap it all up for me. I thought I was being overly concerned with this topic (and after reading your blog, I realised I was) but I didn’t want to rest until I had an answer or felt generally comfortable with the direction I was heading.

    Being a recent DGI greenhorn, I am happy to conclude that this isn’t a real concern for me just yet. For now, I believe my strategy is to purchase the best DG stocks the market has to offer me at the best discounted prices – regardless of sector.

    That being said, I have acquired a few free trades 🙂 I’m hoping to use these to make some opportune purchases as my capital isn’t the highest right now and I won’t have to worry about factoring in the $7 fee… is there anything you are eyeing up / would recommend for my free trade?

    * I also wanted to let you know that I got my first dividend this week and I cracked a nice smile 🙂 $16.82 from NMM. Not something to bowl you over but my 1st dividend, the 1st of many please God

    Keep up the excellent work! With blogs like these, you’re helping so many people start down a path they may never have envisaged.

  31. Regan,

    So glad the article helped. Helping and inspiring others is exactly why I write and share. 🙂

    You’re right in that this concept is something that you should probably just keep in the back of your mind for now, but I’d definitely recommend maybe revisiting it and taking a look at your portfolio once you’re sitting with six figures or so. At that point, you can probably start to see the picture come together and make sure you’re painting with the right colors.

    As far as a free trade goes, I just used up a free trade myself recently on UNP. So you can see where my money is going.

    Congrats on the first dividend. That’s fantastic! I’m confident that will be the first of very many if you stick with it.

    Keep it up!

    Cheers.

  32. I agree that asset allocations are meant to be guide posts, not rules. It’s just a smart way of making sure you haven’t veered too far off the path.

    There’s also plenty of research showing that long-term, powerful returns stem from a much smaller portion of the pie. No reason not to skew that direction.

  33. I’m even looser with sector allocation strategy that you are, Jason. I don’t want to say I don’t care, but as long as my portfolio is well diversified amongst the various sectors that I like (same as you with few very minor exceptions) then I don’t care if I have more than this than that or if I supposedly have more of something than I should. Right now, I can say that I’m way overweight in energy. And you know what? I don’t care. It came from buying great companies at fantastic valuations. I’m going to buy more if given a chance.

  34. Thank you Jason. I purchased UNP last week at $102 (very happy with that). I was thinking OHI and / or NSC or CSX, not decided yet. Is MSFT still a good price? Thank you for all your help & advice and you too, keep up the great work.

  35. DM,

    I like your reasoning and your suggested allocation percentage. I have a few different perspectives. I try to invest in what I know and that is technology and defense, so I am overweight in those areas.

    I would like to get more Consumer Staples and Consumer Discretionary, but those sectors are too overvalued to find many stocks I am willing to purchase at these prices.

    Like you, I have stayed away from Utilities because the growth is too slow. Your point about future changes potentially disrupting utilities is something I had not thought of.

    I use the allocation to help rule out certain sectors for future purchases. I will stay away from those areas that I am overweight for future purchases. It helps to narrow down the list of companies to research.

    Thanks again for sharing your perspective.

  36. Pete,

    I used to think in the same terms, “what is the total value of my portfolio?” Then my wife (not very savvy with stocks) asked me a question… “What do we do with that portfolio once we retire?” This simple question struck me hard, and after some research, I moved into Dividend Growth Investing.

    Now my evaluation of my portfolio is “How much annual revenue does my portfolio generate?” and “How much sustainable revenue will it generate when I retire”.

    Not only does this focus my investing, it also relieves me of worrying about daily stock market fluctuations. In fact, in a perverse sense, I like it when the stock market falls so I can get stocks of good companies on sale.

    So, I don’t worry about comparing my portfolio to the S&P 500 or any other index. I just ask “what is my annual sustainable dividend”.

    I hope this helps.

  37. Congrats on the first dividend!!! It is always a great feeling to get those checks.

  38. It posted my reply before I was even finished writing it. Not cool, Internet. Not cool.

    Anyhoo, my only disagreement with you is consumer discretionary vs utilities. I’ve always approached dividend growth investing with the mindset of “If the economy were to collapse tomorrow and we were to lapse into a second Great Depression, what would be the first thing people stop spending money on and what would people dip into their emergency savings accounts to pay for?”. Consumer discretionary to me is that. Discretionary. From smartphones to movies to luxury hotels, these aren’t things that people need, and in a time of true economic need, they will be the first to go. Utilities, however, are something safe. People will make damn sure they have power, gas, and running water. Their current valuations are bad, which is why I wouldn’t recommend touching them right now, but they’ve always seemed to me to be high yield, low growth stocks. I think those DO have a place in a DGI portfolio (when you’re starting out, it’s great to have that extra cash flow to help you buy the high growth companies that will outpace inflation. And for older people, they might need the income). As for solar, I have a feeling that the utilities will adapt. I think the same way about the energy companies. And I’m not really sure that the utility companies are going to be wiped out by solar energy within such an overly short time frame. I have no numbers to back that up; it’s just a hunch. The technology isn’t there yet to make it both effective AND affordable.

    Of course, my opinions towards certain sectors and industries has changed over time. I used to not like insurance companies because they didn’t really own any tangible assets. At least the banks owned hard, tangible assets. Now I’m sort of warming up to them a bit more. I also have IBM in my portfolio (though I’ve convinced myself that it is a “business staples” company (like “consumer staples” but for businesses) and not just tech), and I wouldn’t be THAT adverse to getting my hands on Microsoft or Apple. And despite what I said before about consumer discretionary, Disney would be a company that I would be happy to own, though the ANNUAL payout is a bit off-putting. I could certainly think of worse. There are other industries as well; I dabble in maritime shipping and BDCs as well, but not all that much.

    Anyway, despite my lengthy diatribe on our differing opinions about two sectors, I must say that this was a great article. And I agree; trying to be too strict with your sector allocation will only paint you into a corner and hinder your ability to find value. Know what sectors you want to be in and what sectors you don’t, find companies within those sectors that are trading at a great value, and don’t worry about how much of your portfolio is allocated to what. Eventually, things will work themselves out. If one sector truly becomes THAT overweight, then you can just stop buying it for a little bit.

    Great work as always.

    Sincerely,
    ARB–Angry Retail Banker

  39. DGI Novice,

    Absolutely. We’re really on the same page there. If I don’t understand a business and how it makes money, I’m out. And that’s why I’m underweight tech in general. The fact that there aren’t as many high-quality tech companies with lengthy dividend growth streaks out there in the DGI universe just kind of makes me feel good about that. But if I were a lot more savvy around tech stuff, I’d be okay with a larger allocation there.

    Go with what you know! 🙂

    Best regards.

  40. ARB,

    You’re absolutely right. No matter what happens in the world, people are going to need basic utilities. However, the electric utility industry is likely going to be undergoing change over the next couple decades as power at the point of usage becomes more prevalent. The industry itself is recognizing the potential for severe disruption:

    http://www.eei.org/ourissues/finance/documents/disruptivechallenges.pdf

    Add in what amounts to poor value in that sector and I’m pretty much avoiding it almost completely. Even if there were better values there, I might be a bit more inclined to up my exposure to a couple percentage points or so. But that would be about it. Growth is capped in that industry. That’s just the way it is and the way it’ll likely always be. I’d much rather have exposure to a global juggernaut than a local utility that’s heavily regulated. Just me.

    But everyone has to find their own individual comfort levels as far as sector allocation and what they invest in. For some, utilities make a lot of sense. I’d just caution what people are willing to pay. I see a lot of utility stocks trading hands for P/E ratios north of 20 even while the underlying profit is growing at just 4% or 5% per year. Add in aging infrastructure, the increased prevalence of supply at the point of usage, and the possibility of what the industry calls a “death spiral”, and I’m not sure the risks are priced in there. Probably not a real solid long-term investment as there’s some opportunity cost there when you’re paying so much for a utility. If I can get my hands on a global juggernaut for 23 times earnings or a local utility selling for the same, the choice is a no-brainer. Not that either is cheap, but the former will likely do far better over the long haul due to a completely different level of potential.

    But I definitely agree on not painting yourself into a corner. Makes no sense really. I sometimes get emails from people who are just starting out and they may have a portfolio of $10k or $20k, and they’re asking about sector allocation. Just really not something one should be concerning themselves with at all at that point. Just my take on it.

    Thanks for stopping by!

    Best regards.

  41. I think the key to sector allocation is just staying diversified. As we saw with Energy last year the entire sector collapsed, but on the other hand the Industrials (especially airlines) received a big boost due to Energy’s collapse. It’s just good business to make sure your portfolio can hold firm against the headwinds of any market moving events. With that line of thought I don’t believe there is an optimal sector allocation as it will only always be changing based off the market’s offerings at any given time.

    I am the guy you mentioned at the beginning of the article with a $25K portfolio. Yesterday I initiated a position in LyondellBassel and I quickly saw my Materials allocation shoot from 0% to 9%. I used sector allocation as a tiebreaker between the stocks on my watch list. I had it narrowed down between LYB and STX from the Info Tech sector. Both companies looked about even based off the financial metrics, but the edge was given to LYB due to my current sector allocation. I already had 20% in Info Tech and 13% in Energy. I saw LYB more of a complement to my Energy allocation as they purchase to oil to refine it into various chemicals and plastics. So a drop in oil should improve the bottom line of LYB based off cap ex while at the same time the majority of my Energy holdings will be hurting as the product they are producing has become cheaper. This purchase has balanced my portfolio to Oil’s volatility (although not Mr. Markets, but that guy never really know’s anything and that is why the dividends keep us happy).

    Also I currently have a 0% allocation in half of the sectors as I am very early in the building stage. One of those 0% categories is Consumer Staples and that is because I have yet to find a stock from that sector that doesn’t appear overvalued on my watch list. Again I think the key is to stay diversified and just make sure that the sectors balance each other out while you keep buying the stocks with the best value at the moment of purchase. Ideally I would like to see no sector represent more than 40%. Other than that, the weighting for any sector can fall anywhere under that percentage.

  42. another good article to read DM. I think this very important to be diversified among several sectors. if you are all in just a few sectors, and one or more of the sectors starts to deteriorate such as oil. this could lead to the fundamentals of your stocks in a sector or sectors to start to deteriorate. this may lead to your stocks being unable to continue to pay you a dividend. and with your stock price coming down and dividend being cut. this is may lead you to be unable to get out of the stock with out taking a Hugh lose. Hurt your portfolio so much it may that you may have to put of your goals. so I say, stay diversified among a lot of different sectors to try protect your self.

  43. Great post DM. it always good to diversify into different industries…. now as long as we can pick the best of breed stocks, we’ll be sitting pretty. But you never know what the future might hold. Good thing is, with so many great companies, it will be hard not to be successful in the future.

  44. DM, good article. My top 4 sectors are similar to yours except that I have Industrial swapped with healthcare. In general, I try to change my allocation by adding but I don’t have specific target allocation percentages.
    Likewise, I don’t have any utilities – but sometimes I view my position on T and VZ as utilities in terms of yield & growth.
    D4S

  45. Dividend Mantra,

    Sector allocation is not very suitable up here in Canada if you only invest in Canada. We have the big banks (RY BNS TD CM BMO), energy stocks and telecommunications (Rogers, Telus, Bell, and Shaw) and lots of resource stocks.

    There is not much for consumer staples. So if an investor wants to invest in JNJ, PG, Clorox, CL etc. they would be wise to wait for the Canadian dollar to go higher. There is some great companies in Canada that Canadians would benefit owning but a lot less to chose from with a low Canadian dollar . Just means being more careful in what I invest in up here and a learned the hard way with a few companies I have bought.

    I bought your book recently and did a review in my last post.

  46. TDM,

    You’re definitely still in that early building phase, which is something I was mentioning in the article. With $25k under your belt, you see how much one stock purchase can affect your allocation and diversification. And that’s really why I didn’t even really bother much with sector allocation until I broke six figures. I mean I always wanted to diversify broadly, but I never made it a point to be overly concerned with those percentages across the portfolio.

    “Ideally I would like to see no sector represent more than 40%. Other than that, the weighting for any sector can fall anywhere under that percentage.”

    Probably not a bad way to think about it. But be careful because three sectors could “fall anywhere under that percentage” and still take up your entire portfolio. Not a big deal at $25k, but that could be problematic if your portfolio is five or six times that size.

    Thanks for dropping by!

    Cheers.

  47. michael,

    Definitely. It’s really all about maximizing dividend income sustainability and growth while at the same time minimizing risk of dividend cuts/eliminations and mitigating those effects if they were to occur. And broad diversification across many of these sectors tends to do a pretty good job at that as long as you’re sticking to your guns regarding quality and valuation.

    Thanks so much. Glad you enjoyed it! 🙂

    Take care.

  48. ADD,

    Thanks!

    You’re right. Nobody has a crystal ball. I try to make sure every investment adheres to my general principles, but industries change, companies miscalculate, and consumers’ preferences evolve. As such, it’s important to diversify across the sectors and individual companies within those sectors while also focusing on quality and valuation at the time of purchase. We can’t be right 100% of the time, but we fortunately don’t need to be to succeed at this strategy. Just have to make sure you’re not wrong too often. 🙂

    Cheers.

  49. Div4son,

    Great point there. I also look at the telecoms as quasi-utilities. And I think that’s a great way to achieve “utility-like” numbers in terms of yield and growth without necessarily buying utilities. Waste management companies are another good example of that.

    Within utilities, I certainly like the water utilities a lot more than the electric utilities. But those valuations are just not attractive right now, in my view.

    Thanks for sharing!

    Best regards.

  50. IP,

    Thanks so much for the purchase and review. I stopped by and read the review before dropping a comment. Really appreciate that!

    You guys up there in Canada are at a bit of a disadvantage in terms of your economy’s breadth. California has more people than the entire country of Canada, so it’s just something you have to work around by investing internationally. I don’t really concern myself with currency effects all that much, but I imagine I’d be singing a different tune if I were a Canadian investor. Just have to focus more on the domestic plays or ex-US plays when the dollar is strong. Lots of opportunities out there. 🙂

    Best wishes!

  51. In the 2008 bear market, stock prices decreased by about 50% while dividends decreased by about 23%. So really you care about risk-adjusted returns. If DM’S portfolio gets 1% lower long run total returns than the S&P but his dividend income does not decline in the next recession, then his risk adjusted returns may be better than the index. Or at he may value the lack of volatility more than the extra 1% return. It depends on your goals.

  52. Hi Jason- I tend to view Utilities the same way as ARB above, and think that they have historically been one of the best classes to be invested in. As a dividend growth investor who’s family has held Ute’s for generations, I have seen how stable and profitable they have been in bad economic times as they are really a great defensive play. I consider them an essential base to my portfolio, throwing off huge dividends that I can pump into my other holdings. I agree they are a bit lofty in price now, but recently had a good pull back, exposing some value. I just recently bought more SO, and I think that a dividend growth investor can’t go wrong with picking up the larger quality companies. I hold WEC, LNT, SO, and ES, and my gains and dividends have been amazing. WEC, and LNT’s dividend growth have been stellar as well.

    I am 30, and have no problems holding Ute’s with a 50 year plus investing horizon. The strong are adjusting, and will continue to adjust. Most of them have been working with alternative energy and developing it for some years now. My father who inherited Ute shares from his father said that since the 70’s people have been saying that the industry would be disrupted, just the same as oil. I think we will see the landscape continue to have more mergers and the larger regional players grow, but the general thinking of a major disruption to the industry that was popular a few years ago seems to really have subsided, as the industry continues to pump out profits, and innovate for the future. If anything, I would be more worried (I’m actually not) for the future of oil companies given the changes in technology. The best part about large stable companies is that they can fund ventures into new areas effecting their business, or buy out smaller companies that do it better.

    Thanks again for this article, I thought it was good for thought. Given that I tend not to trim positions, I certainly have a higher allocation to some sectors.

  53. presone,

    No doubt that utilities have performed pretty well over the last few decades. They provide ubiquitous and necessary services, which offers a lot to like. But I share the industry’s concerns over potential disruption. I don’t think anything will happen overnight there, but I also happen to just find the other sectors more attractive in general when assessing risks, growth potential, and overall long-term dividend sustainability. As such, I think one can construct a pretty solid and large portfolio with zero exposure to utilities and maybe even be better off for it.

    I see some adaption in the industry there with alternative/renewable (which is why I like AVA), and those that rely less on coal will probably do better. Though, I think the bigger issue will simply be the availability of power at the point of usage, which the industry cites as a potential disruption. We’ll see how it goes, but I truly don’t see the values there across that sector as it pertains to the risk involved. And like I mentioned, I think one can do just fine with no exposure there at all.

    That said, SO and WEC sport some of the better fundamentals in the industry. But I still have a hard time seeing the value in paying 19 times earnings for a local utility with capped growth and the risks therein. Then there are stocks like ED, on the other hand, that make no sense at all to me with a yield of 4.25% and a 10-year dividend growth rate of just above 1%.

    Just not really a sector that I find a strong pull toward. However, it’s a big market with different stocks for different folks. The key is finding what works for you. And I do wish you the best of luck with all of those holdings! 🙂

    Cheers.

  54. Jason,

    Very good allocation by sectors, the only remark I would make is related the Health Care which would push closer to 20-25% in regards of how the behavior of the people and the emerging market that will suffer the same issues than developed countries.

    Cheers,

    RA50

  55. RA50,

    Probably not a bad way to go there. The long-term tailwinds appear to be present. You’d then just have to decide which sectors you were going to take away from.

    I’m really excited about quite a few stocks in that sector. I’d love more exposure there. Just waiting for the combination of available capital and opportunities to hit at the right time. So many stocks, so little capital. 🙂

    Cheers!

  56. Sure, If I had the allocation you have, would take out 2% from Industrial, 2% from Consumer Discretionary and 2% from Consumer Staples that will give 6% for the HC.
    Cheers,
    RA50

  57. Hello DM,

    Thank your for the article, that helps a lot.
    As I have started a DGI this month I am building up some positions.
    I haven’t bought a lot of consumer staples stocks because I feel there a not a lot of bargains available.
    What consumer staple stocks would you consider when you are building a portfolio right now?

  58. Thanks. You’re quite right. Your sector allocation clearly reflects the mixture of the fact that your retirement is both near but also likely to be a pretty long term affair! So getting the right mix of growth and income is even more imperative. As it stands, I am far from sure when/if early retirement will occur. As such, I am positioning myself moderately “aggressively” (if that is possible).

    Financials are a very lucrative area in general. I have a small amount of REIT exposure and quite a lot of insurance (both speciality and standard life) in there. But banks are bigger than I want. However, I will likely reduce this simply by not topping up. I am certainly looking to beef up my REIT holdings over time (or at least property related investments).

    We will see. As always, these things should shimmy and shift with the times!

    Thanks for taking the time to reply and keep up the good work!

  59. Hi DM,

    I think its a good point to keep looking at the sectors, but its also interesting not to forget the (sub)industries and market movement. I understand why you you like Consumer Staples, but i believe that the constistant stability you are looking for might just be in the sector you have been avoiding the most…

    You mention that you avoid Utilities with a target of ~3% portfolio share.Yet regardless of the oil/gas pricing, the pipes generally are in use and as such they get paid. People will always use and consume water, and when they dont – its basically the #1 ingredient of any and all other drinks. And no matter what happens to the oil/gas utilities, there is no influence on the water side.
    As result some of the biggest and most renowed dividend payers are found there.

    Something to consider: American States Water (60 years growth, #1 growth streak in the US), Northwest Natural Gas (#3 US with 59 years), Canadian Utilities (40+ years growth, #1 holder in Canada), Fortis inc (40+ years growth, #2 Canada).

    Power generation utilities are the only one i’d agree on avoiding completely for the time being. With the arrival of Solar Cells those might be getting a few million more competitors soon… Tough to compete they need to be hooked to the grid, so electrial utilities in charge of the cables and connections will again get paid regardless of who does what.

  60. Hey Jason,
    Thanks for going into detail about the GICS. It’s the first time I’ve ever heard of it to be honest. I was always using a general “small/mid/large + international/bond” allocation scheme. I’m really interested to sit down one day and see how my portfolio looks using the GICS model.
    Thanks Again,
    -Rich (27)

  61. I also think about sector allocation a bit loosely as I build the portfolio. Well into the 100k+ range, valuation and the right price trumps anything else like diversifying.

    I will say that I disagree with your point on technology, but I do get the viewpoint. I honestly think that ALL products seem impossible to re-engineer, even the simplest businesses like rails. My point is just that all businesses and their competitive environments change, so it’s a bit of a guessing game beyond ~15 years what will really happen.

    I’m already in most of the major tech/hardware/software names (AAPL, MSFT, INTC), so there’s only a handful remaining. CSCO is on my watchlist, and maybe 1-2 others, but large cap tech is overall attractive. Unfortunately, I am quite a bit overweight in tech at ~15%, and very underweight in health and industrials. Fortunately, good values in many areas, so like always I’ll go where it makes sense to put some money.

    You did raise an important point that it’s good to start thinking about long-term allocation targets to make sure you don’t get TOO far off course… especially as the stash continues to grow!

    Finally broke 4.5k in fwd dividends. Excited to hit 5k in fwd dividends by the end of the year!

  62. As we all must agree, there are two possibilities:

    1) you beat the S&P 500
    2) you do not beat the S&P 500

    If case 1 is true, there are two possible explanations. Either you are very smart/lucky, picking stocks from the S&P 500 universe that perform better than the rest. This is very unlikely over the long run.
    Or you pick stocks from a totally different universe. Then a different benchmark representing that universe should be used. Again, beating this other benchmark over the long run is difficult, to say the least.

    If case 2 is true, all your work was for nothing*. You could have achieved better results by investing in a cheap index fund. The dividend payout rate does not matter (maybe psychologically), the total growth of your wealth (total return) does.

    This whole analogy “dividends are the fruit, selling shares is like chopping off branches” is complete bogus. A dollar is a dollar. There are not “fruit dollars” and “branch dollars”. But to use your analogy: If a company gives you a dollar it’s like the company is chopping off a little branch from itself. Its value and thus its stock price decrease.
    The only difference is in the number of shares. But the number of shares you hold does not have any intrinsic value. It’s the total amount of dollars invested in a company that counts (shares * price). Dividend payouts reduce the price, selling shares reduces the number of shares. It’s two factors. It doesn’t matter which one you decrease by x%. The result is the same. In fact, if you pay taxes on dividend payouts that you do not have to pay on price appreciations, the result will be worse in the dividend case.
    Sure, uniformly selling shares in a portfolio with several individual stocks is a practical problem. But if you own a few thousand shares of an index fund, it’s not. The only downside is transactions costs.

    So, comparing to an index absolutely makes sense to assess if the whole stock picking work is worth its time and effort. But pick the right index.

    * well no, since you earn money by writing about your stock picking work…

  63. Nice write up DM! My ideal sector allocation is nearly identical to yours.

    I agree, looking at the sp500 as a comparison is not fruitful. Many of the unrealized gains that people have from that index will not be theirs to keep. On the other hand, no one can come in and take your dividends back!

  64. Hi there,

    I’ve a ~16K dividend growth portfolio (I’m 23 and I started my portfolio just last May) with positions in 22 companies and 5 different sectors. In your opinion, is it best if I invest new funds into new companies or would it be better if I invest new funds to increase holdings in existing positions?

    Thanks

  65. my 401K are in S&P 500, and mutual fund of housing, europe, financial … so basically it should be evenly distributed, no matter what I do in my taxable account, I’ll be pretty well diversified :P. I’m getting interested about allocation after checking out Mr. DivHut’s porfolio update.

    http://portfolios.morningstar.com/fund/summary?t=SPY … if you want to see how well diversified the S&P is made up.

  66. RtR,

    Glad the article helped! 🙂

    I agree with you on the valuation concern. It’s really a concern that stretches to most sectors right now, which is why one must remain vigilant. But just because a sector is pricey, it doesn’t mean every stock within the sector is so. One stock in the Consumer Staples sector that appears particularly appealing to me right now (and has for a while now) is PM. The valuation, yield, and growth potential are all really solid. They’ve had some difficulties because of the strong dollar, but the underlying business is doing very well.

    Cheers!

  67. GoT,

    Great point there about water utilities. I’m lukewarm on them. The need won’t be going away, but the overall fundamentals for quite a few aren’t so compelling to where I feel like I’m really missing out on much.

    I actually wrote an article a few days ago on AWR as a fundamental check, which got published today:

    http://dailytradealert.com/2015/05/20/this-stock-has-raised-its-dividend-for-60-years-in-a-row-2/

    You’re getting a yield of 2.21% and a 10-year dividend growth rate of 6.5%. Not bad, but not so great to where I think I need to make a lot of room in the portfolio for something like that. Again, a rounding error or maybe a percent or two for something like that is fine by me. And it’s not just the long-term concerns of the grid and availability of power at the point of usage, but also just the fact that growth is heavily regulated/capped. AWR has the military contracts that help, but you’re also looking at a pretty ridiculous valuation here. I remember some people were questioning my purchase of DIS not too long ago on a valuation basis, yet AWR’s P/E ratio now is even higher than what DIS was at the time. One’s a local water utility, the other is a global franchise. The growth potential isn’t even close. As such, I think investors ought to be careful when thinking about utilities.

    But I’m not here to argue with anyone. I’m just presenting my ideal allocation. Every investor will have to figure out their own ideal allocation. That might be a 10% allocation or even 20% allocation to utilities. If I’m not buying, that’s less competition for your shares. 🙂

    Cheers!

  68. Rich,

    Well, there are a lot of different allocation models out there. This is just speaking to the individual sectors within stocks. You also have your asset allocation models as well, which will determine your mix between equities and bonds (and any other assets). But I think it’s important to kind of think about which sectors you feel better about over the long haul. I think most investors tend to find themselves more compelled by certain areas of the economy, and the portfolio will likely show that. Like I mentioned, I only loosely thought about asset allocation after passing $100k, so this is largely just the organic manifestation of my own interests. 🙂

    Best regards!

  69. Ravi,

    Yeah, I agree with you there. None of us possess a crystal ball. So it’s impossible or anyone to say what any industry will be doing in 10 or 20 years. But I think there is certain levels of change that tend to occur in certain industries more than others, and tech is just one of those industries where change occurs much more often. And, again, I think that’s why you have so many consumer stocks with lengthy dividend growth streaks and so few tech-oriented companies.

    Then again, tech is all around us now. It’s not just Microsoft and Apple that are in the industry of tech. Most industrial companies (even really mature ones) tend to work very closely with high-tech processes, so there’s risk of tech everywhere. And companies like Apple are really a quasi-consumer company, selling consumer goods. So the lines are easier to blur than every before. Like I mentioned before, my strategy involving tech is really just to focus on the blue-chip companies that produce a ton of cash flow. That cash flow gives them a lot of cushion and a lot of opportunities to adapt. When they can’t adapt organically, they can buy it. So I like that.

    Great job on the dividend growth over there. Keep it going!! 🙂

    Best wishes.

  70. Ralph,

    There have been a lot of people over the years that stop by the blog once to drop a comment that’s simply meant to incite an argument. And I used to let those people rile me up. But I just don’t anymore. What I’ve learned is that there is no value there. I believe in one thing. You believe in another. That won’t change. I’ve experienced tremendous success (I’ve killed the S&P 500 over the last five years, by the way, but it doesn’t really matter), and maybe you have as well.

    Best of luck with your strategy!

    Take care.

  71. Patrick,

    Thanks for stopping by!

    Couldn’t agree more with you there on capital gains and dividends. My portfolio fluctuates by thousands of dollars every day. And you would think that a correction would be imminent. But the dividend income will very likely keep on rolling my way, and increasing all the way through. The dividends come from company performance, not stock market performance. Big difference.

    Like I’ve said before, my bills will be paid with dividend dollars one day, not investment performance. I can’t go to my landlord when the stock market falls by 40% or so and say: “Hey I don’t feel very good about pulling any money out of my investment account because my asset values have been slashed by 1/3, but I beat the S&P 500!”

    Best wishes.

  72. annon,

    You’re in a great spot over there. That’s fantastic that you’re only 23 with a $16k portfolio. By the time you’re may age, you could be already financially independent. Keep it up!

    That’s a good question there. But it’s also impossible fore me to answer. Some people like a concentrated portfolio. Some like to own 100 stocks. Only you can really answer that question for yourself. But I like to own a lot of businesses. All kinds of businesses. I find a lot of businesses really interesting. And I also like to protect my dividend income as much as possible by spreading my bets around a lot of high-quality companies across the entire economy and world.

    But you should always be thinking about valuation. There have been periods where I was quite active on just one stock because I thought the valuation was too strong to ignore (like TGT, DLR, BBL, NOV, UL, etc.). And then there were other times where I’ve spread my capital around quite a bit. I think that’s just something you’ll have to figure out as you go along. Besides, that’s part of the fun. 🙂

    Keep it up!

    Edit to add: I’d also caution against spreading yourself out just to diversify. I’ve noticed some investors are “chasing” stocks just to add another name to the portfolio, while ignoring valuation. That’s probably not a good idea. I can tell you that I had a bit under $29k spread across 15 companies when I published my first FF update on the blog. So that might give you an idea of my own trajectory over the years:

    https://www.dividendmantra.com/2011/04/freedom-fund-update/

    Best regards.

  73. Vivianne,

    Good point there. A lot of people have retirement accounts set up where they have funds there, and so there is a lot of diversification (across sectors and perhaps assets as well) already occurring, even if your taxable account might be concentrated. Just depends on how you have your capital spread around. 🙂

    Thanks for dropping by.

    Cheers!

  74. Good article. As someone who works in digital, my personal preference is to overweight tech since I understand the industry. Also if you sort of “pull back the dolly” on the macro picture, we’re really still in the midst of one of the great transformations into a new era where tech – internet of things, robotics, etc etc – will transform the way we live and work (and many of us won’t need to work anymore). You raise a good point about not being able to know who will lead in 40 years in this space, but odds are you won’t go wrong with MSFT, CSCO, GOOGL, AAPL, ORCL, etc (many of which pay a nice dividend) and some of the bigger names who are investing heavily in autonomous vehicles, robotics, smart cities, augmented reality, and other such initiatives that will change the way we live and work over the next decade or 2. Just my 2 cents.

  75. I really do agree that it’s not about the early picks for folks starting out. My first stocks in the portfolio were GSK and BT. Both at were over 25% each of my portfolio back in 2010!! But over time I’ve added around the outside to diversify, and they are both now sub 15%.

    Even my diversification hasn’t been terribly well planned if I’m honest. I’ve just gone where the brokers are currently naysaying a dividend stock, as they do to certain sectors and stocks at different times. If you’re not overly concerned with short term stock price performance, you can get some great dividend-paying bargains. This recently happened here energy firms SSE and CNA here prior to our recent election.

    I think the mentality has to be that you’re never going to sell any of these stocks, that they are simply the asset that generates the income rather than real ‘money’ in their own right. It helps guide better decisions. And if you go where the value is, you’ll diversify without realizing it!

  76. Rightly said! Well written.
    I also do not believe in sector allocation. I think this concept is more relevant in case of MFs where you benchmark against a standard index and generate alpha by adjusting the weights.
    Also if I could add another sector to the list – Education , since my personal experience in investing in these stocks has been pretty decent.

  77. dzogen,

    That’s a great example of leveraging your own personal experience/education and customizing your exposure accordingly. And I definitely agree with you in terms of the major tech companies. I still don’t quite feel comfortable with my level of certainty regarding smartphone market share versus the odds that people will continue to buy mayonnaise and toothpaste, but I think one would be served well by sticking with the blue-chip tech companies (like your MSFT, AAPL, IBM, etc.) that produce so much cash flow that they can kind of maneuver around somewhat easily. The fact that they all pay a healthy dividend also means you’re able to take a little cash off the table as you go, if you need to.

    My personal experience is in the auto industry. And it’s actually because of that experience that I don’t invest in auto manufacturers. So it works both ways. 🙂

    Thanks for stopping by!

    Best regards.

  78. Squodgy,

    Exactly. This allocation isn’t really all that important unless you’re already well into building your portfolio out. At one point, one stock was 100% of my portfolio. Then there were two stocks that made up 50% each. So on and so forth. If you worry too much about percentages when your asset base is still so small, you’ll end up doing yourself a huge disservice. That’s akin to missing the forest for the trees.

    “And if you go where the value is, you’ll diversify without realizing it!”

    I agree with that. Values tend to skip and hop around the sectors a bit, depending on what’s popular and what’s not. You also have a lot of cyclical sectors out there that provide better values at different times, depending on where those industries are at relative to the general economy. As such, if you hunt the best bargains down, you’ll find yourself buying heavily in different sectors as you go. In addition, I think most investors will find that their portfolio mirrors their own interests over time, and so that’ll probably play itself out as well.

    Allocation like this is really more of a general guideline, rather than hard numbers. But I do think it’s a good idea to start taking a good look at it as the portfolio starts to mature. And that’s because it’s harder to buy yourself out of trouble by adding new stocks with fresh capital and changing the numbers up. If you find yourself way too heavily in, say, REITs at $500k in, that might be a situation where you’re selling off some hefty dividend payers just to spread out risk. But, again, I think this is something that tends to organically flesh itself out over time.

    Cheers!

  79. harsh,

    Well, I believe in sector allocation. But only loosely. And I think it’s really only somewhat important as your portfolio starts to mature. It’s something I’ve been looking at a bit more now that the Fund is nearing $200k, but it’s also not something that really dramatically shapes my buying decisions.

    I actually think education stocks will fit under the Consumer Staples sector. ESI, for instance, is in that sector. All the sectors you see above represent the entire economy, so there should be no stocks/industries left unrepresented.

    Best regards.

  80. I’m going to jump on the bandwagon on people responding to your post. I will now use an ad hominem attack and–no just kidding.

    But I do disagree that total returns are what matters. For some, yes, and others, no. It depends on your end goal and how you view wealth. For me, the increase in paper wealth is meaningless to me. My end goal is to live off my dividends. In order for me to capitalize on capital gains–on the total return–I would have to SELL the income producing asset. That means less dividends. Even without selling, an increase in the stock price means less ability to buy more of it. An increase in my PAPER wealth equals a loss (or opportunity cost) of my REAL wealth.

    I’m not saying you’re wrong. Just disputing one of your statements. It greatly depends on your end goal, and when your end goal is living off of your dividends, then total returns don’t mean all that much.

    Sincerely,
    ARB–Angry Retail Banker

  81. Thanks for the article on portfolio allocation. I see you moved some trading over to Tradeking to reduce some costs. Have you given any thoughts or investigation into using Motiff Investing as it could solve some or both problems of allocation and expense and also re-balancing a portfolio?

  82. The Aiki Trader,

    There were actually a few readers that asked about Motif when I reviewed TK. You can read my responses over on that post. The short answer is that it appears gimmicky to me, with very little real cost savings unless you’re just buying up 30 stocks at a time just to spread your capital around with no real thought as to analysis or valuation. I think part of the issue is that one is assuming there’s an allocation issue to be solved. I don’t think there is, as this post kind of points out.

    I wish I could get behind the idea of Motif because it offers one of the most lucrative affiliate programs around. But I just don’t see it.

    Best regards.

  83. ARB,

    Great points there. Thanks for adding that.

    I lack the energy and enthusiasm to meaningfully and artfully respond to these debates anymore…especially when people stop by only to criticize the strategy or what I’m doing without taking the time to understand it. I guess that jaded attitude comes after years of fruitless responses. People will see what they want to see. I’ve realized over time that there’s little value in that and I’m way too busy to get wrapped up in debates anymore. I’ve seen these total return vs. dividend income debates stretch on and on over at Seeking Alpha and it all appears quite pointless to me. I simply present the information and inspiration. People will do what they want with that. But I think, over time, the real-life result will speak for itself.

    In the end, I think my energy and focus is best directed at those I can help. Every minute I spend debating with someone is one less minute I can spend actually making a difference.

    Best regards.

  84. Nice post, enjoyed reading it! You made some very good points, as did a lot of readers.

    One thing I wanted to bring up (don’t think anyone else has mentioned it) is that since the goal for most dividend growth investors is to generate income, then it would make sense to look at your portfolio’s sector allocation that way also. That is, look at your sector allocation by % income rather than by % value.

    For one thing, depending on the sector, there can be a fairly significant difference between the two numbers. For example, REITs currently make up 13.5% of my portfolio’s value, but contribute 18.5% of its annual income. And of course, it’s the income that I really want to know about.

    Another thing is that the income allocation percentage for each sector will tend to be a more stable number than the corresponding value allocation percentage, as the various market segments go up and down, and every which way. So it’s less of a moving target.

    I don’t fret about the exact allocation numbers too much either, but just like to use the most meaningful information when I do take a look at it.

    Keep up the great work here. This blog is a terrific read!

  85. Tom,

    Thanks so much! Glad you’re enjoying the blog. 🙂

    Yeah, you make a great point there. That’s really the more accurate way to look at the allocation for all intents and purposes as it relates to this strategy. However, I find that more time consuming. And since we’re not completely “coloring in the lines” here, I find the usual weighting/allocation method using market value as a pretty good proxy.

    It’s actually because of that – looking at allocation and exposure in terms of dividend income – that I kind of came to terms with this allocation as being pretty ideal. You’re getting a good chunk of the high-quality stuff that tends to yield less with a higher weighting there, and then a lower weighting to the stocks that tend to yield a lot (like utilities, telecoms, and REITs). All in all, I think that would probably result in a pretty suitable spread across the spectrum.

    Thanks for stopping by!

    Best regards.

  86. Great post. Here’s my sector allocation (by value). Right now I only have APD in materials, but there’s few good pickings (as expected) in that sector. I put REIT in a separate category because I don’t really think of it as part of financials.

    Technology 12.26
    Telecom 5.81
    Health Care 9.77
    Energy 13.60
    Consumer Staples 13.63
    Consumer Discretionary 9.88
    Industrials 9.41
    Utilities 4.22
    Financials 9.26
    Materials 1.63
    REIT 10.53

  87. Spoonman,

    Awesome! Thanks for sharing. 🙂

    That’s a good-looking allocation there across the board. I think my allocation mostly differs on tech and staples, but that’s pretty solid. Even better, yours is “in action” in terms of actually living off of the dividend income.

    Best regards.

  88. I used to get worried when my (small) portfolio would fail those “portfolio health”-type checkers. Like you mentioned, now I feel more like sector diversification is minor compared to other considerations, more of a guideline to see whether you should be making an effort to look for value in a certain sector you may have been ignoring.

    >Technology changes rapidly. As such, it’s difficult to forecast exactly which companies are going to be dominant five years from now, let alone for the next 20 or 30 years.

    Agreed that technology is maybe not the most attractive option for a pure dividend growth investment strategy. A friend was recently trying to convince me to buy and hold forever all my stocks, and my counterpoint was that a lot of what I dealt with, the micro biotechs, was short-term. Not gonna bank on them being around 40 years–so the strategy with those is very different, and it’s not Dividend Growth. I don’t have much capital to deploy each month, so I feed the dividend half of the portfolio all the gains from the short-term, volatile half, and that’s worked well so far.

    My portfolio definitely has sector diversification issues; it’s almost all Materials (40%), Energy (20%), and Health Care (30%). On the other hand that is far and away what I understand best, so I’m a little conflicted about diversifying out. Like with financials, though the business model seems simple on the surface, I read the shareholder materials and it’s all gobbledygook. When I can’t figure out what’s going on, I’m more uneasy at heart about that stock than much riskier holdings in a familiar industry, even if it is a blue chip or throwing off good returns–it’s a black box and I would never know if something inside was broken.

  89. Thank you for sharing this. I agree with your principles, except for techno stocks that I like! 😛 But these are not a big chunk of my portfolio either. Just like you, I prefer focusing on the quality of stocks I’m buying, so I keep it loose when it comes to sector allocation. My ideal might be slightly different from yours, but still looks alike.

    Diversifying too much can also be bad for dividend growth investing anyway!

    Cheers,

    Mike

  90. Jana,

    “On the other hand that is far and away what I understand best, so I’m a little conflicted about diversifying out.”

    I think diversification is very subjective. I would never recommend to diversify into sectors or businesses if you’re not completely comfortable there. There have been a number of sectors and stocks I’ve passed up over my years because I just didn’t totally understand how the business worked. mREITs, BDCs, and a number of tech stocks come to mind pretty quickly. Like I mentioned above, I think one’s portfolio will, over time, mirror that person’s interests and risk profile.

    And you’ve got examples across the spectrum in terms of famous investors and sector/stock diversification. Buffett is pretty heavy in four stocks in Berkshire’s common stock portfolio, with a strong tilting towards Financials. Then you have Lynch who had something like 1,000 stocks in the Magellan Fund when he stepped down. So an argument can be made for anything across the spectrum. Again, I look at it in terms of maximizing dividend income and growth while at the same time minimizing the risk of dividend cuts/eliminations while also thinking about how to mitigate the potential impacts. And I think the allocation I’m developing is doing a pretty good job at that, which will probably prove out over time.

    Best regards!

  91. Mike,

    I’m with you. Quality and valuation above all else. Valuation tends to skip around the sectors over time, which means a well-rounded and diversified portfolio shouldn’t be too hard to build over time even if one is focusing on quality and valuation first.

    Thanks for stopping by!

    Cheers.

  92. Someone mentioned about keeping REITs in a separate sector; that’s actually a quite good idea because GICS “authors” are about to do the same. Real estate will be the 11th sector in the future (according to Wikipedia article Global Industry Classification Standard)

    For some reason I stubbornly tried to balance sectors with equal 10% share in my portfolio but that’s probably not the best idea in the world 😀

  93. Jason,

    Great article on a topic I haven’t seen much discussion on within the dividend investing community.

    I completely agree that allocation does not need to be addressed immediately. I would suggest a diversification of companies when starting out, but sector allocation is something that can be addressed later on.

    Acknowledging the industry is always important, as you said, if you buy 5 tech companies starting off, you should have an idea of the potential risks. However, starting at the sector level and THEN buying a stock based on gaining exposure to that sector would be a poor strategy starting out.

  94. Mr Bean,

    That’s probably not a bad idea. I wasn’t aware that they’re separating out the REITs. I actually do kind of look at REITs separately and mentioned them separately when I casually discussed my ideal allocation in the PC review, but I included them in Financials here so as to give an apples-to-apples comparison. In that regard, I’d like REITs to be about 10% with all other financial stocks to make up the other 10%.

    I’ve never heard of anyone trying to equally weight the sectors out like that. Maybe it’s not a bad idea. I suppose it really all depends on which areas of the economy you prefer. If you have no preference, then maybe you can just even them out across the board. I would just prefer, say, a group of global healthcare stocks over, say, a group of local utilities. Just me, which is why the allocation is as it is. 🙂

    Cheers!

  95. RTR,

    Thanks! It’s something I’ve wanted to address for a while, but just haven’t had an opportunity to. I suppose that’s kind of funny because I’m almost 700 articles deep here on the blog. Looks like there’s still a lot to talk about. 🙂

    Yeah, I’m with you there. I started off buying great businesses all over the economy. And that’s because I like all different kinds of businesses. If I had a strong background in, say, healthcare, then maybe that’s an area of the economy I would felt a strong pull toward. But I like investing railroads, toothpaste, real estate, medical devices, food products, etc. So that spread across the sectors allows me to hedge my bets. And I found, over time, the portfolio naturally just mirrored my interests, which I think most investors will find true as well.

    Best regards!

  96. Hi DM,

    Nice write up. Currently I barely look at sector allocation. If I find a stock that gives me enough bang for my buck I buy it. As long as the company fits in my long term vision it can have a place in my portfolio.

    I would feel perfectly safe with a portfolio that is stuffed with KO,Pepsico, Unilever, Nestle, … but I wouldn’t sleep with a portfolio stuffed with MSTF, Apple and such. It just depends on the mindset of every person.

    Cheers,
    G

  97. Geblin,

    I’m with you. Value and quality first and foremost. Though, I’ve looked at the allocation a bit more now that the portfolio is starting to mature a bit. And that’s only because I can’t purchase my way out of trouble once it gets to a certain point. So it’s really just managing risk and exposure.

    But I’d definitely feel a lot more comfortable with a basket of Pepsis and Unilevers than a basket of Ciscos and Apples. 🙂

    Cheers!

  98. I like that classification system.. what would you put UNP under, for example? Industrials?

  99. Good read – I was thinking a lot about these sorts of ideas lately. Agree with most all of it.

    Sector weighting is pretty silly while building up a portfolio

    An equity bought at a good value > trying to achieve some artificial benchmark

    I use a passive commission free low cost S&P index fund to sort of let that be my Info. Tech sector allocation, seems like it’s a really nice complement to a stable of majority value/div growth holdings.

    Pretty easy to “beat the market” but you have to be able to stomach ugly temporary paper losses.

  100. Steve,

    Exactly. UNP would be in the Industrials sector. I’m pretty sure Morningstar follows these classifications, so pulling up any stock ticker should tell you what sector it falls under.

    Cheers!

  101. Bill,

    “An equity bought at a good value > trying to achieve some artificial benchmark”

    Agreed. Quality and value trump all else, in my mind. And value tends to move around a bit, meaning you’ll likely diversify across the sectors given enough time and regular purchasing. However, I think sector allocation becomes more important the further along you are. If you find yourself with a 50% weighting in, say, Financials when you’re 90% complete with the portfolio, but you’re not comfortable with that, that could be a problem. So I think it makes sense to take a peek at this stuff maybe every $50k or so once you pass six figures and kind of see where you’re at relative to your own interests and preference. But, like I mentioned, I think most people will find that, over time, their portfolios mirror those individual preferences, meaning the diversification will organically occur without too much thought process behind it.

    Thanks for stopping by!

    Best regards.

  102. RIT is also very important branch. RIT also have inverse correlation to shares

  103. שגב,

    I think you’re referring to REITs? If so, they’re classified under the Financials sector as I noted:

    “I will note that the Financials sector includes REITs.”

    Although, it appears that they’ll fall under their own, new sector in 2016 from what I’ve read.

    Take care!

  104. For me, sector allocation plays a very large role in how I approach my portfolio, perhaps almost to a fault. I consider REIT’s to be a stand alone sector so for my purposes there are 11 major sectors. I try to have equal exposure to all eleven at all times. Whenever I make an investment, I try to do it in one of the 2 or 3 sectors that I have the least exposure to at that given time. I feel this accomplishes two things. First, it obviously spreads out risk across a very broad spectrum. Secondly, and perhaps more importantly, by trying to maintain near equal weight in all sectors, when I make a purchase in my lowest weighted sector, I am normally buying when the stocks in that sector have declined and are often at a discount. I feel like this method helps me to narrow my focus on each purchase. For instance right now, I’m lightest in Energy and Industrials, so I am looking closely at stocks in those sectors for my next investment.

    As far as my preference for each sector themselves, I agree with you on the Technology sector, as that is probably my least favorite. I feel the opposite as you though about the Utility sector. While I agree its growth is slow and also limited, it is generally safe, steady, and high yielding. While they are largely regional, they are basically monopolistic. For example, if you want to live in the largest city in the U.S., you will likely be doing business with Con Edison. For the most part, you can’t shop around for your Utility provider. Also, the high yields of the Utilities in my portfolio are playing a significant role while I am in the “accumulation phase” of my dividend investing venture.

    I know my method may be overkill, but it does help me sleep at night to know if a single sector crashes, I won’t be wiped out.

  105. BCS,

    I don’t think your method is overkill at all. Every investor has to invest in a way that allows them to sleep at night and manage risk appropriately. Sounds like that works for you. I would only say that that might be an aggressive way of looking at sector balance if your portfolio isn’t already quite large. If I would have been trying to evenly spread my exposure across all the sectors (or meet my “ideal” allocation) when the portfolio was half its current size, I think I would have been doing myself a disservice, potentially ignoring good opportunities just to meet a goal/weighting that probably didn’t matter all that much at the time.

    I think the water utilities make a lot more sense than the electrical utilities. More and more people are having solar panels installed. Subsidies and lower prices will probably allow that to continue/increase over time. Once people stop using the grid so much, that increases strain on the existing monopolies in terms of pricing and maintaining the grid. They then have to raise prices to maintain profitability, which increases the costs for those customers still left, which means they’re more likely to find a replacement. The industry refers to that as a death spiral of sorts. I don’t think it’s right around the corner or anything, but it’s a distinct possibility. ED runs a monopoly for sure, but with a yield of less than 4.5% and a 10-year dividend growth rate of 1.1%, that’s really not a very attractive opportunity, in my view.

    Thanks for dropping by!

    Best wishes.

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