Only you can decide for yourself which is the best dividend stock to buy next. If there are several dividend stocks that you love, but you can only choose one to buy right now, here are some things you can consider.
Keep your allocations in check
You should know how much invested capital you have in each stock holding and each sector and or industry. You also should know how much they’re worth at market value. This is so that you won’t have too much invested in any company, which should help reduce emotional buying and selling.
Here’s a simple example. Let’s say that five years ago, for our portfolio, we originally invested $2,000 in each of Toronto-Dominion Bank (TSX:TD)(NYSE:TD), Emera Inc (TSX:EMA), Alimentation Couche-Tard Inc (TSX:ATD.B), Amgen, Inc. (NASDAQ:AMGN), and Brookfield Asset Management Inc (TSX:BAM.A)(NYSE:BAM).
In other words, we invested an equal amount of money in each company for the equal-weight portfolio. Each holding made up 20% of the portfolio.
Five years later,
- TD has appreciated 58%,
- Emera has appreciated 57%,
- Couche-Tard has appreciated 600%,
- Amgen has appreciated 214%, and
- Brookfield has appreciated 137%
So, at market value, they’re as follows:
- TD is worth $3,160 (= 1.58 * $2,000),
- Emera is worth $3,140,
- Couche-Tard is worth $14,000,
- Amgen is worth $6,280, and
- Brookfield is worth $4,740.
The portfolio now totals $31,320.
- TD makes up 10% of the portfolio ($3,160 / $31,320),
- Emera makes up 10% of the portfolio,
- Couche-Tard makes up almost 45% of the portfolio,
- Amgen makes up 20% of the portfolio, and
- Brookfield makes up 15% of the portfolio.
There are different theories around allocations. Depending on the number of holdings investors have, some investors with large portfolios of 50-100 stocks like to keep each holding to be no more than 3% of the portfolio. Others allow winners to run; those investors will never trim even if a company wildly outperforms like Couche-Tard did.
At the end of the day, you’re the one holding your portfolio. So, you should be comfortable with the amount allocated to each company and sector/industry.
You might also track the amount invested so that you won’t keep adding to losers. If a company continues to underperform quarter after quarter, it’s probably experiencing some problems. And you should look into it to determine if it’s a permanent or temporary problem and decide whether to keep adding to the company or not.
Some investors also track dividend allocations. So, they won’t allow one company to contribute more than 5% of the portfolio’s income, for example. This is to reduce the risk in the scenario in which a company cuts its dividend, which would likely lead to loss of capital as well if the investor decides to sell.
Compare dividend yield to history
If you have money to buy shares of one company today, other than considering the allocations, you can also consider its yield history. Does the company show support at a certain high yield?
For example, TD showed some support at the 4% yield point in the last five years. So, investors can consider buying some TD when it reaches a 4% yield.
This method works best for dividend-growth companies with safe, decent dividend yields of 3-6%.
Do you have other ways to help you determine which dividend stock to buy next?
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: At the time of writing, I own shares of TD, Couche-Tard, and Amgen.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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