How To Manage Risk In A Dividend Portfolio

By: ispeculatornew
Date posted: 02.09.2012 (6:30 am) | Write a Comment  (0 Comments)

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Dividend investing is more popular than ever and as I’ve said, I am convinced that dividend investing is much more than a trend because in the end it leads many investors to becoming rich.. It is an investing philosophy that is likely to do well over long periods of time. Sure, it will under perform in certain circumstances but I think most agree that we are not likely to see huge bull markets anytime soon. Much more likely are flat to down markets are the deleveraging continues and while Europe continues to deal with its main issues.

Dividend investors will tend to do much better in such markets. That being said, I think that dividend investors still need to build an optimal portfolio to manage risk as efficiently as possible. Why?

Not Optimizing Your Portfolio = Leaving Money On The Table

Basically, a portfolio that does not manage risk correctly might do better for a few weeks or even a few months but over longer periods of time, a portfolio that has good risk management will perform better, have less volatility and is less likely to have serious problems.

How Can I Manage Risk In My Dividend Portfolio?

There are a few different things that should be done when managing a dividend portfolio:

Diversify the industries that you buy: Owning a stock that is heavy in financials, commodities or any other type of industry is not optimal. You ideally have a few names in each industry in order to do well no matter how the economy does.

International Diversification: Holding a few international names or US stocks that have strong international business will help you from suffering big losses if one economy such as the US one suffers from big problems. This also gives you protection from dollar weakness and provides you with significant opportunities in foreign markets.

Monitor Your Holdings: At all times, you should monitor your holdings by doing the following:

-look for signs of weakness in sales and/or earnings
-look for any slowing down/halts/reductions in dividend payment increases
-keep stop losses that will limit the losses you can suffer on one stock. Big declines also often signal upcoming dividend reductions.

Ideally, you get rid of your weaker stocks early on in order to keep a strong looking portfolio.

How Often Should This Be Done?

I personally feel like all names should be looked at on a monthly basis (at a minimum) while things like having solid diversification and international exposure can be looked at on a quarterly basis.

How Do You Manage Risk In Your Dividend Portfolio?

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