Why Dividend Portfolio Diversification is Important

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When putting together a dividend portfolio, it is important to remember to diversity. In some cases, it can be tempting to chase the high dividend yields related to certain sectors. However, as many found out during 2008 and 2009, putting too many of your dividend eggs in one basket can create serious problems.

When a Sector Runs Into Trouble: Dividend Cuts

Some dividend sectors are popular due to their high yields. REITs, utilities and financials are good examples. Financials provide an especially apt example of the need for diversification in a dividend portfolio. Prior to the financial crisis, banks were viewed as Titans among dividend stocks. They paid reasonably high dividends (that always seemed to be rising), and they provide decent capital gains.

However, as trouble began brewing in 2007 and 2008, dividend increases slowed to a crawl. After the financial crisis, which hit banks quite hard, dividends were slashed in 2008 through 2009. For those heavily invested in bank stocks not only saw huge losses in terms of capital as stock prices dropped, but they also saw a reduction income as dividends dwindled away.

Of course, this is something that can happen in any sector. As a result, it is important to consider diversity in your dividend portfolio Consider ways to include dividend stocks from a variety of sectors, and consider including a health mix of dividend aristocrats. This way, if one sector verges on complete collapse, you aren’t as devastated by the results. You are especially vulnerable if you count on dividends for income.

Diversifying Your Dividend Portfolio

As you diversify, make sure that you are considering quality stocks, and that you include a mix that will help you meet your goals. Pull from different sectors of the market, and you can also add diversity with dividend funds and foreign dividend stocks. There are a number of ways that you can add a little diversity to your portfolio and still enjoy a stable income stream and limited risk.

Be sure to do your research and analyze the stocks you include. You want good quality stocks in your dividend portfolio, ensuring that you have solid choices that are unlikely to see big drops in payouts at the first sign of trouble. If you have a little extra room for the risk, though, it might not be a bad idea for your diversity to include some good growth dividend stocks with a little more risk. Just make sure that you are balanced out elsewhere so that if your bet turns out to be a bad one, you aren’t devastated.

Dividend News: Plenty of Profits — Are More Dividend Increases on the Way?

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Today, with the stock market closed for the Good Friday holiday, it’s a good time to reflect on the events of the past week, and on earnings season. First quarter earnings reported by a number of companies have so far been rather positive. Included in the earnings bonanza was dividend aristocrat Johnson & Johnson, a company that beat estimates and increased it forecast for the coming year.

Other companies also reported solid earnings, including Intel and Wynn Resorts. Banks also showed good profits this week, including Citi, which is recovering from its near collapse following the 2008 financial crisis. Indeed, as Citi shareholders questioned the plans of Citi executives, a promise was made: A higher dividend in 2012. The company cited profitable quarters all through 2010, and a good profits in the first quarter of 2011 as evidence that its plans were working.

Last week saw a number of announcements related to rising dividends, and the prospect of improved profits and cautious optimism that recent housing market and employment news will mean a pick-up in the economic recovery has many hoping that more good news is on the way.

However, before anyone gets too excited about the return of increasing dividends, it is important to note that there are still some hurdles to overcome. U.S. companies and foreign companies may be turning profits right now, but the situation is far from stable in the financial markets. The euro zone remains on the verge of a meltdown, high oil prices are likely to hinder economic recovery, and we can’t ignore the budget battle brewing as politicians try to remain popular while solving the nation’s budget woes ahead of the 2012 election year.

The positive earnings news of this past week may have caused investors to forget the downgrade to the U.S. sovereign debt outlook at the beginning of the week, but it is something that still needs to be considered going forward.

The Highest Dividend Yields aren’t Always the Best

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Sometimes, when building a dividend stock portfolio, it can be tempting to chase the highest dividends yields. However this is not always the best idea. Indeed, many recommend that a yield target of 4% to 6% is ideal, and even that 2% to 3% is acceptable. That can sometimes seem a little low, especially when you consider that there are yields of more than 8% – and even yields of more than 13%.

One of the reasons that some companies offer such high dividends is to encourage others to invest in shares. There are some smaller companies or start up companies that offer high yields in order to try and get more investors. If you are looking for something short term, this might not be a bad idea in some instances. You could see high yields, and make money. However, if you are looking for a long term investment or stable income, higher yields aren’t always the best answer.

Issues Associated with High Dividend Pay Outs

There are some issues that you have to be aware of when you see high dividend pay outs. When a company pays high dividends, it is paying a portion of its profits. Making high dividend payments cuts into the cash that a company has available. Companies may not be able to sustain such high payments for an extended period of time. If you are counting on dividend payments for regular income, you might be disappointed if the company can’t sustain high pay outs for a long period of time.

Another problem is that sometimes high dividends are used as a way to attract investors – even though the company isn’t stable. Sometimes, high dividend yields can be a cover for a company that is crumbling. You could find yourself invested in stock that turns out to be worthless later.

Finally, you might be wary of dividends that fluctuate. You might see high dividends for a couple years, and then see a dividend cut later. If dividends fluctuate regularly, it can be difficult to set up a regular income portfolio. High dividend stocks, even those that fluctuate, can be interesting additions if you are looking for growth instead of income (especially if you reinvest), but you may not be able to rely on them for regular income.

Screening Dividend Stocks

A good way to filter out bad dividend payers is to look for stocks that have a solid dividend history of raising dividends. Our safe dividend list has stocks that have been raising their dividends for 25 years or more. You should also pay attention to the payout ratio and dividend growth rate. We like stocks that have a payout ratio under 60 and a dividend growth rate of 5% or more. Take a look at the top dividends list for more info.

Even if you do use high yield dividend stocks as part of your strategy, it is wise to be careful, and to keep an eye on the news about the companies involved so that you can sell your stock at signs of trouble.

Dividend Stock Investing: Going Foreign

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Many investors fail to think of foreign stocks as they formulate an investing plan. However, investing in some well-chosen foreign stocks can be a good way to diversify your portfolio, and look for more earnings from different sources. Before investing, though, it is a good idea to do some research. Just investing in something because it seems like a solid choice, or because someone else gives you a tip, is rarely a good idea. You want to vet your foreign dividend stocks the same way that you vet U.S. dividend stocks.

Where to Find Foreign Dividend Stocks

Finding dividend stocks from other countries might be a little more difficult than identifying dividend stocks in the U.S. However, there are a few ways to go about looking for foreign dividend stocks:

  1. Start in the U.S.: You don’t have to go to foreign exchanges to find stocks from other countries. There are nearly 900 foreign stocks trading on U.S. exchanges. A little more than 1/3 of them pay dividends.

  2. See what you can find in foreign dividend ETFs: One of the best places to look for investing ideas is to look in funds. Dividend funds in the U.S. can provide you with a list of potential companies to invest in. The same is true of foreign dividend ETFs. Check out what is held in different ETFs, and you will find some possibilities. Of course, once you have the company names, it is up to you to research your choices, and decide which ones to invest in.

  3. Subscriptions: Of course, you can always make use of subscriptions and special newsletters. Take a look at our list of foreign dividend stocks.

As always, you want to make sure that you are performing your due diligence. There are plenty of smart dividend investments overseas that can provide you with a way to earn a stable income from dividends, while also adding an element of diversity. Remember: There is a whole world of investments outside the U.S. You might do well to explore other opportunities available to you.

What’s Your Dividend Yield Target?

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One of the items to consider as you put together your dividend portfolio is yield target. You want the dividend stocks in your portfolio to meet your requirements for growth or for immediate income. This means that you will need to define your goals before building your portfolio.

What is a Good Yield Target?

As with so many things related to investing and to finances, what is good for you depends largely on your goals, as well as where you are at right now. One of the most important questions to answer about your portfolio is whether you plan to use it for income right now, or whether you are trying to grow it so that you can use it for income later.

If you plan to use your dividend portfolio for income later, you might be more interested in total returns than in yield. The yield is nice, since it will add to the number of shares that you own, but the total return might be a bigger focus. You can sell your investments later, after they have grown, and use the proceeds to invest in those stocks with higher yields for income. For many investors, a yield between 2% and 4.5% or 5% is acceptable for a dividend growth portfolio. There are a number dividend aristocrats that increase their pay outs regularly that can be ideal for this type of portfolio.

But what if you want income now? If you plan to use your portfolio for income right now, matters might change. You will need a higher yield in order to enjoy a higher income stream. This means your yield target should be between 4% and 6%. A lower yield won’t provide you with what you need. However, you don’t want a dividend yield that is too high. In some cases, a high yield can mean that there are problems, or it could be unsustainable. In either case, a yield that is too high is likely to be cut – and then you will see a reduction in income.

The key with an income dividend portfolio is to look for stocks that are likely to provide stable pay outs. There are dividend aristocrats that have pay outs in the 4% to 6% range, and that can satisfy those with a lower risk tolerance.

Bottom Line

Before you decide on dividend stocks for your portfolio, consider your goals, and what investments are likely to help you reach them. It might be wise to consult with a financial planner who can help you sort through your options.