In the Search for Optimal Numbers of Stocks in your Portfolio Part 1

Each week, I read numerous dividend investing blogs. Most of them are authored by savvy investors who have been following their own dividend investing strategies. What is amazing about investing is that there isn’t a single strategy that trumps all the others. There are many ways to make money on the stock market. What really matters is that you find the one that works for you. This is probably the hardest part as most investors you encounter will tell you they have the strongest strategy of all. It’s only normal as they have invested all their money into it!

What shocked me about the dividend investor community is that there are many differences on how they invest their money. One aspect that tends to generate the greatest variation is probably the number of different stocks owned by each investor. I personally like to have strong positions in fewer companies while others buy new companies almost every month.

Which one is good?

Which one is bad?

Is it possible both strategies work?

I guess so. In order to better understand how each dividend blogger manages their portfolio, I asked 11 of them by email. They were kind and generous enough to feed me with tons of information to my questions. I actually received more info than I expected. Before I explain my own conclusions, I will share with you this week the answers received. Since it would be too much to digest in a single post, I will publish part #2 this Thursday. I strongly suggest you click on all the links suggested by the bloggers in order to get the full picture from each of them. It’s a privilege to access so much information stacked in a single article.

Here we go!

 

Dividend Mantra

#1 What is the size of your portfolio?

Dividend Mantra portfolio is valued at about $200,000 right now. You can see it here.

#2 How many different company shares do you own?

I own equity in 64 different companies as of right now (but that could change at any time).

#3 How many new company shares do you expect to buy in 2015?

I’m unsure. I don’t set a target.

#4 What is your target or maximum different company shares owned?

I don’t have a target for that, either. I’ll stop initiating new positions when I run out of great ideas. Hasn’t happened yet.

#5 How do you manage your asset allocation? (do you have a goal in % for each sector, size of each holding compared to your overall portfolio, do you rebalance your portfolio?)

I have some rough target numbers for sector allocation, which I discussed here:

#6 How do you keep up with all your existing holdings (do you read their financial statements, only headlines during earnings seasons, special reports, etc?)

I receive email alerts from Seeking Alpha whenever earnings come out, a dividend is announced, or there’s some other news pertaining to a company. These literally take me a few minutes in the morning to quickly scan through. It’s not particularly difficult or time consuming. I’ll read through quarterly reports when I think there’s something worth reading. And I’ll occasionally peruse annual reports when I have time. Most of the companies I invest in just don’t require babysitting, however. And that’s kind of why I like investing in them.

 

Dividend Developer

#1 What is the size of Dividend Developer portfolio?

My total net worth is ~$144,000. Of that, I have some assets which I don’t focus on in my day-to-day life. So my actual public stock portfolio is roughly ~$110,000.

#2 How many different company shares do you own?

As of right now, 62. I have two companies on my probation list, though: McDonalds (MCD) and California Resources Corp (CRC). They may be sold soon, which would bring the total to 60.

#3 How many new company shares do you expect to buy in 2015?

Ooooo, tough call. I recently did two sets of purchases, which basically cleaned out my wishlist. I also realized I can’t own every company I want without being uncomfortable with my portfolio size, so I focused on not adding any new ones. But because life is the way it is, there are still companies I want to buy at some point. This probably means that once I’m done with my research on them, I may open up a small (<5 shares) position in them.

The dividend growth companies I am considering adding are:

1) Airgas (ARG) – industrial gas companies are generally good investments, I didn’t like Air Products (APD), but ARG is a solid 3rd player behind APD and Praxair (PX). Good dividend, and a very nice earnings growth trend. However, they do not make most of their own gases, which is a competitive weakness.

2) CR Bard (BCR) – it has a low dividend and a low dividend growth rate, but has very solid earnings growth and a wonderful share repurchase program. Plus, it’s a health care Dividend Champion, two terms I love to hear in an investment.

3) TJX Companies (TJX) – Low dividend in a competitive sector, retail. But excellent dividend growth. And more importantly, my girlfriend and I like shopping there. And like Peter Lynch said, invest in what you know. If I know them and like them, might as well own stock in them.

4) United Technologies (UTX) – I used to own them, and the recent price drop makes them look really good.

The strict-growth companies I am considering include:

1) World Fuel Services (INT) – They’re a fuel distributor who’s been hit by the oil collapse. They have a nice earnings trend, regardless. The only problem is that they hold the dividend constant most of the time. The yield itself is low at 0.5% as well.

2) Papa Johns International (PZZA) – My girlfriend and I like pizza, and we both think PZZA makes the best around where I live. And they recently initiated a dividend. Good enough for me.

3) Facebook (FB) – Everyone I know uses them very often, even if they don’t like it.

4) F5 Networks (FFIV) – They help distribute applications quickly and securely over networks. It’s an area I studied a bit in grad school, and I’m bullish on it.

5) Palo Alto Networks (PANW) – A cybersecurity company. I have my Master’s degree in cybersecurity, and they’re in a good place. Pretty overvalued though.

6) Check Point Software (CHKP) – Another cybersecurity company I’ve been watching, probably the best I know of. They are HQed in Israel though, and I don’t know the tax implications of that. I usually avoid non-US companies.

Of course, I won’t buy these all, maybe 5 at most. Based on my current research, my rankings from “must buy” to “forget it” are: TJX, BCR, FFIV, CHKP, FB, UTX, ARG, INT, PZZA, PANW

#4 What is your target or maximum different company shares owned?

My target is ~65 companies. I’m okay with being under that, and I probably will exceed that a bit. Maybe by quite a bit in the long run, due to spinoffs, demergers, and other fun things. I’m not comfortable owning less than 50 stocks, because I just don’t feel adequately diversified. And 70 is about the point where I start to forget what I own, which I also consider a bad thing. So considering what I currently own and still want to buy, 65 stocks seems fair.

#5 How do you manage your asset allocation? (do you have a goal in % for each sector, size of each holding compared to your overall portfolio, do you rebalance your portfolio?)

Asset allocation? What asset allocation? 🙂 Seriously though, I don’t care too much. I do want to be 95-100% equities in my non-401(k) accounts, but I don’t have a target sector allocation per se.

Most of the time, I just want to own specific high-quality companies, regardless of what sector they fall in. Kind of by definition, my portfolio will be weighted more in some areas more than others. For example, I will most likely never own a telecom like AT&T (T) or Verizon (VZ) because they don’t meet my criteria for earnings and dividend growth. Likewise, I will be underweight basic materials due to their cyclicality. Conversely, I will most likely always be overweight in consumer discretionary, consumer staples, and industrials, because many companies in those areas meet and exceed my criteria.

I don’t rebalance or trim at all. My only real goal is to have a set minimum in each stock by retirement age, about $15,000. That means that the smallest position size will need to be $15k. If a stock’s value shoots high above that, I won’t trim it, however. Let your winners run, and all that. The number of $15k’s a little arbitrary, but basically comes around like this: I need about $30,000 to be comfortably financially independent. Assuming a 3% withdraw rate, I will need about $1 million total. $1 million divided by my ideal 65-position portfolio equals ~$15,400 per position.

#6 How do you keep up with all your existing holdings (do you read their financial statement, only headlines during earnings seasons, special reports, etc?)

I only really keep up with my companies on SeekingAlpha. I follow each ticker I own. Even then, the only things I consistently read are (a) dividend declarations (to see if I got a raise or not), (b) earnings news headlines (to gauge if my companies are on track, or is something going wrong), and (c) bearish articles on my holdings (to see if my investment thesis needs to change).

And really, I only follow (b) and (c) if I’m already hesitant about one of the companies I own. For example, I rarely, if ever, read the press releases for companies like Johnson & Johnson (JNJ) or Precision Castparts (PCP) because I have no doubts that they will continue to perform well over time. However, I followed BHP Billiton (BBL) closely before the divestiture since I wasn’t sure how the dividend would be impacted; I sold that. Same thing with Baxter (BAX); sold that too. And like I said above, I am currently monitoring McDonalds (MCD) (due to declining franchisee satisfaction, trends among Millennials’ eating habits, and just plain nasty food) and California Resources Corp (CRC) (due to being a small, somewhat unproven operator focused solely in a state that doesn’t like oil too much).

 

Dividend Earner

#1 What is the size of your portfolio, Dividend Earner?

I have over $300,000 in my dividend portfolio. The other part of my overall portfolio is invested in index funds through the defined contribution plan my company provides.

#2 How many different company shares do you own?

I have a total of 24 unique companies in my portfolio as of writing. A number of them appear in multiple accounts.

#3 How many new company shares do you expect to buy in 2015?

In 2015, I may take a position in one or two new companies. However, many companies have pulled back like the banks and may just add to existing positions. It really depends on what is available when I have money to invest.

#4 What is your target or maximum different company shares owned?

I find that around 30 companies is manageable. I recently did some consolidation around the banks which has reduced my overall number of companies.

#5 How do you manage your asset allocation? (do you have a goal in % for each sector, size of each holding compared to your overall portfolio, do you rebalance your portfolio?)

I do have sector allocation targets. It’s a nice way to see what pulls back and what moves ahead. I find it can more easily let you see where to focus for adding new money. The size of one particular investment has not been a concern but I do try to be even within my investments within an account. I don’t rebalance my portfolio per say as I am always adding money and I focus on the sector that is behind.

#6 How do you keep up with all your existing holdings (do you read their financial statement, only headlines during earnings seasons, special reports, etc?)

All my holdings appear in my US or Canadian stock lists that I maintain and I have all the information I need there to make a buy / sell decision. The business of my holdings doesn’t really change per say but ultimately, I have all my holdings in Google Finance so I can see all the news about each stock when needed. I also subscribe to Stock Chase and receive all comments from analysts based on my holdings.

http://www.dividendsnapshot.com/products

 

Dividend Growth Investor

I believe you might like this article on the “perfect number of stocks”

Here is my favorite quote from this article “I find that investors who focus on absolute number of stocks in a portfolio, miss this important nugget of gold (artificially limiting the number of holdings). There is no limit to the amount of companies in your dividend portfolio. It should only be limited by the number of good ideas you have. You should also build your portfolio slowly, one position at a time, and several buys per position.”

#1 What is the size of your portfolio, DGI?

I don’t think it matters what my portfolio size is. What matters is that MY forward dividend income could cover somewhere between 60% – 80% of MY expenses ( I use a margin of one times to one and a third times monthly expenses to incorporate a margin of error)

You might like why I am anonymous here.

#2 How many different company shares do you own

I probably have exposure to more than 100 individual companies. The 50 largest holdings account for something like 90% of portfolio value. I monitor companies better when I own 1 share.

#3 How many new company shares do you expect to buy in 2015

I do not set artificial limits on what companies I will purchase or when I will purchase them. I invest only when I have new cash on hand, and only in what I believe to be the best ideas at the time. I try to invest once per month, though sometimes it is twice.

#4 What is your target or maximum different company shares owned?

I strive for equal weight, but it is not always possible. It is all dependent on what values are available at the time I have cash to invest, while making sure I am diversified as well.

#5 How do you manage your asset allocation? (do you have a goal in % for each sector, size of each holding compared to your overall portfolio, do you rebalance your portfolio?)

Overall I do not target a specific “allocation” overall. It is all dependent on opportunities available to me. I see no reason to buy bonds for the sake of owning bonds, when their long-term expected returns are low at the moment.

I recently talked about re-balancing.

I also recently posted an article on “sector allocation”.

#6 How do you keep up with all your existing holdings (do you read their financial statement, only headlines during earnings seasons, special reports, etc?)

I focus on source information – annual reports, press releases etc. My broker Interactive Brokers is really good – they tell me when dividends are changing, when earnings are released, and send me annual reports to my office.

 

My Dividend Growth

#1 My Dividend Growth, what is the size of your portfolio?

$68,200

#2 How many different company shares do you own?

28

#3 How many new company shares do you expect to buy in 2015?

0-10

#4 What is your target or maximum different company shares owned?

I currently have no set target. Possibly 40-60 depending on my ability to keep up with them.

#5 How do you manage your asset allocation? (do you have a goal in % for each sector, size of each holding compared to your overall portfolio, do you rebalance your portfolio?)

I’m just beginning my long accumulation phase and aside from tracking it, I don’t pay too much attention to my overall allocation. I don’t want to be overwhelmingly allocated to one sector and I would consider 40% overwhelming. I also don’t want to own several direct competitors from the same industry and may try to limit those businesses to two or three of each. If my allocation does get out of hand, I hope to only re-balance with fresh capital and selective dividend reinvestment.

#6 How do you keep up with all your existing holdings (do you read their financial statement, only headlines during earnings seasons, special reports, etc?)

I use several apps and websites to monitor and check on my holdings on a daily basis. That includes price movements and several news sources, though some days I pay more attention than others. I like to watch prices because I’m deploying cash regularly and hope to recognize when opportunities present themselves. For safer core positions, I will usually stick to reading only annual reports and interesting sounding articles that pop up on my feeds. For other riskier holdings, I may dig in even further for detailed analysis. The bulk of my research is done before I buy the stocks in the first place.

 

Stay Tuned for the next part on Thursday!

I would rather give you all the info this week and comment on them next week based on my own research and background. Thx to all bloggers who participated into this project!

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