Does anyone else take a look at their dividend weights versus the actual weights of stocks in their portfolio? There could be some additional hidden risks to your income stream because of high yielding stocks.
If you read My Business Plan , I’m targeting 40 stocks in my final portfolio having an average weight of 2.5%. Right now in my building phase I don’t get too alarmed unless a position is greater than at least 5%. This doesn’t mean I sell some of that position but instead I try and bring up the weight of other positions with new purchases. Over time I hope to smooth out these portfolio weights.
Take a look at the tickers BBL, BP and KMI. Below is a snapshot from my portfolio. Notice that my portfolio weight for these three stocks are 2.95%, 5.14% and 6.28% respectively. At first glance, BBL doesn’t seem alarming at all, it’s barely over the 2.5% average I’m targeting. The other two are a little rich here at over double my target weight but I’m not overly concerned as I was working to add to energy positions while they were depressed.
Now take a look at the snapshot of my dividend page. Notice that my dividend weights for BBL, BP and KMI are 6.72%, 9.39% and 12.78%. Now this is a lot more alarming. I have 3 stocks that make up 14.37% of my portfolio but they contribute 28.9% of total income!! Now this is something a lot more concerning.
At first glance it didn’t look too bad but when I look at the income I’m relying on, it’s a whole different story. The chances are probably small but they are much higher now than just a couple of years ago for one of these companies slashing dividends. If I had to guess, I’d say BBL would be first followed by KMI and then BP. There’s a reason KMI is yielding nearly 8%, they have a lot of debt and are being drug down with other energy stocks right now. They have already given a little lower guidance in dividend raises. BP is in the same energy mess and even BBL has some energy exposure along with other depressed commodity prices. Nobody knows for sure how long this cycle for lower gas prices and commodities will last.
Honestly, this does make me a little nervous. If this were my final built portfolio, meaning I wasn’t contributing any more, I’d be extremely worried right now. Luckily, my portfolio has a long ways to go and I plan to smooth it out with new purchases. This does lessen the worry somewhat but it’s still a concern and I’ll be keeping a closer eye on this.
What would happen if KMI and BBL cut their dividends in half? Well, I’d lose immediately 9.75% of my income stream! That’s nothing to laugh at. It’s certainly not something I would want to stomach if I was already living off dividends. Heck, I’d feel that hit right now.
This is why it’s important to diversify. I have a long ways to go in building my portfolio but I like to keep track of my portfolio diversification. Dividend weight is just another form of diversification that I believe is important to keep an eye on.