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.
You make a compelling case for looking at the relative weight of one’s dividend income, rather than the weight by market value. I think I’ll have a look at this for DivGro soon — especially after having had to cut two holdings due to recent dividend cuts!
Thanks for sharing!
FerdiS
FerdiS recently posted…15 Dividend Increases, November 2 To November 6, 2015
FerdiS,
It’s worth looking into especially if you plan on relying on dividend income for retirement. You already know first-hand then if you have gotten some dividend cuts. I’d be curious to see if others had some out of whack dividend weights compared to actual weights in their portfolio.
Thanks for stopping by!
Diversification is a useful tool for reducing risk.
Balancing your per stock income is good to help reduce the impact of any stock reducing its dividend.
I’d also want to diversify my income outside of just dividend stocks in the event of a larger market event, be it rental income, an annuity, or other additional income stream.
Jack recently posted…What’s New for the Financially Inclined #1
i wish i could figure out how to setup this spread sheet i thought i had it downloaded it and opened into my google docs but it wasnt updating …..
Hi Alex,
Shoot me an email if you have problems. I’ll help you as much as I can.
Take care!
I looked at this for my portfolio at the beginning of the year but just changed my portfolio spreadsheet around to give RT updates for it. Energy is my 3rd highest capital weighting but my highest dividend weighting and eventually I want to get that down lower. I haven’t added to energy names other than reinvesting some dividends so it’s come down from earlier in the year. The biggest hole in my portfolio from my ideal allocation is healthcare which only makes up 8.7% of the capital and 6.4% of the dividends. I want to push that up to at least 10/10 and probably higher. Consumer staples are also under where I’d like them to be but it’s so hard to add to them at good values that it’s difficult to justify adding them to the portfolio when other sectors are giving much better values.
JC @ Passive-Income-Pursuit recently posted…Dividend Growth Investing at Work – Upping the Ante With the Happy Meal
JC,
Realtime updates are awesome and the google spreadsheets take a lot of work out of the equation once they are set up. I love going to a cumulative spreadsheet, I check it more often than even logging into my brokerage accounts.
If energy stocks stay depressed , I’m going to start piling in more money around the first of the year. I don’t mind being temporarily overweight to catch what could be a great investing opportunity. I know oil will eventually rebound.
I love the healthcare sector. The yields are lower but growth much higher, I’m with you on that. I want healthcare to eventually be one of my biggest sector weights.
I like selling puts on some of the consumer staples stocks. If KO ever gets below 40 again I’m going to add some shares.
Thanks for stopping by!
Hi AAI,
This is very interesting to look at. I never really considered looking at the dividend weight of individual stocks making up your total portfolio income. I’ll have to see how my income flows and what stocks contribhte too large a percentage.
Thanks so much for writing this!
DB
Dividend Beginner,
I’m glad this was helpful. I figured I’d point it out since a lot of people may not consider this but I do think it’s important to look at.
Cheers!