How many dividend stocks to own in your passive income portfolio?

By: ispeculatornew
Date posted: 03.10.2011 (5:00 am) | Write a Comment  (11 Comments)

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It’s a common question and there is no way to answer it perfectly. Why? Because you could probably bring 10 different “experts” and they would all come up with different answers. There is no perfect answer but it’s a question that I get so often that I thought it’d be interesting to at least give my point of view. Let’s start with the basics.

Why you would want a number of stocks to be as small as possible?

-Having less stocks also means less trading fees
-The more companies you have in your portfolio, the more difficult it becomes to track them

Why you would want it to be a big as possible?

-To smooth the passive income (adding companies makes dividend changes for one company less visible)
-To not depend on a specific sector or company too much (imagine having only a few financial companies during the most recent credit crunch)

So how do you decide?

So what does it become? It’s basically a balancing act where each person would have a different “middle point”. The number of stocks would generally depend on:

-Your ability to tolerate volatility
-The size of your passive income portfolio (for example, I have written about starting a dividend portfolio with $5000… do not spread such an amount over 10-15 stocks).
-The amount of time you want to spend researching these stocks
-The turnover you wish to have (are you a buy & hold or do you rotate often?)

How do I proceed?

It’s not necessarily set in stone, but here are my basic guidelines depending on the size of the portfolio:

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As you can see, the number of stocks, at least for me, does not vary that much. Once I reach a passive income of $100,000 or so, I would generally keep the same number of stocks. Why? Because tracking and finding 25 winning dividend stocks is more than enough for me. It does give me comfort knowing that a 10% drop in any one of these stocks results in about a 0.4% loss for my portfolio which is very sustainable. I would from time to time change these 25 stocks obviously but trying to do too much reallocation can end up costing too much both in terms of trading costs but also the return. Why? Because chasing returns has always been shown as a losing strategy. You go with stocks that you believe in and that have strong fundamentals, not the stocks that have done the best in the past 12-24 months because those are very likely to not be the best performers in the next 12-24 months.

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11 Comments

  1. Comment by Echo — March 10, 2011 @ 9:57 am

    This is definitely a good rule to follow, particularly for Canadians starting out investing in their TFSA for the first time. $5,000 to $10,000 is not a lot to diversify yourself, yet you have to be mindful of the fees.

    I always try and follow the 1% rule where your trading costs don’t exceed 1% of the transaction. So if you’re just starting out and you have a $29 trading fee, you should purchase no less than $3000 worth of one stock.

    I’m a bit behind your ratio, I just crossed the $55k mark in my combined portfolio but only own 14 stocks. But that $55k includes over $8k in cash waiting for a couple of good buys.

  2. Comment by IS — March 14, 2011 @ 7:30 pm

    @Echo – I would agree with one condition. Sacrificing 1% of return for fees for an investment that will last 10-20 years is fine..but if you are trading very frequently, 1% is way too much in my opinion.

  3. Comment by Open source portfolio — March 10, 2011 @ 3:31 pm

    Minimizing trading costs is half the battle. Investing is easy.

  4. Comment by IS — March 14, 2011 @ 7:29 pm

    @Open Source Portfolio – Not sure I’d go THAT far:) But I certainly agree that most investors overlook the importance of minimizing fees over the long term!

  5. Comment by Magnus from ilovedividends.com — March 12, 2011 @ 10:30 am

    My portfolio contains both swedish and us stocks. H&M is an amazing no debt swedish company! 🙂

  6. Comment by IS — March 14, 2011 @ 7:27 pm

    @Magnus – What is H&M’s ticker?

  7. Comment by Magnus from ilovedividends.com — March 15, 2011 @ 8:43 am

    H&M’s ticker on Stockholm stock exchange is “HM”.

    Proposed dividend this year is SEK (Swedish Krona) 9.50. It’s traded right now at SEK 201. With a yield about 4.67%.

  8. Comment by IntelligentSpeculator — March 15, 2011 @ 9:20 am

    @Magnus – Very interesting, are they listed on any other exchanges?

  9. Comment by Magnus from ilovedividends.com — March 15, 2011 @ 4:20 pm

    As far as I know their only listed in Stockholm.
    But that’s the beuty of internet – access to all markets 🙂

  10. Comment by IS — March 27, 2011 @ 1:41 pm

    @Magnus – No doubt yes:)

  11. […] their dividends over time.  Intelligent Speculator shed some light on a debatable topic: how many dividend stocks to hold in your passive income portfolio.  Some readers discussed the high costs of brokerage fees.  This is less of an issue for us as we […]

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