You build a dividend stock portfolio one stock at a time. But how much should you buy the stock of a quality company until you stop?
You might stop when the stock is no longer attractively priced or when you’ve bought a big enough position.
If you are relatively new to investing, you might be confused about these terms: “starter position”, “partial position”, and “full position”. I’ll explain them real soon (in the section after the next one).
Dividend Stock Portfolio Building Examples
Portfolio building is about spreading risks. You might refrain from buying more than 25% of your stock portfolio in a sector or 5% in a stock. For example, banks, insurance, and asset managers fall under the financial services sector.
Under the 25% rule, these holdings cannot make up more than 25% of your portfolio when you make purchases. Under the 5% rule, you won’t have more than 5% in Royal Bank of Canada (TSX:RY)(NYSE:RY) or Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) when you buy their shares.
You might also limit how much you invest in a dividend stock by the yield it provides. For example, a high-yield dividend stock that pays a 10% yield could be risky. If so, you might only limit it to contribute to only 1% of your annualized income. It could be a great move to just avoid risky, high-yield stocks altogether.
Not all high-yield stocks are risky. You’ll need to perform fundamental analysis on potential ideas to determine if they’re risky or not, given the economic condition or situation at the time. During a market crash, a nice bunch of quality dividend stocks could provide nice yields of 5-10%.
Here’s a concrete example. A new $11,000 dividend portfolio that’s focused on growth (or dividend growth) might look like this with $1,000 invested in each of the following:
- Alimentation Couche-Tard (TSX:ATD.B) – from the Consumer Staples sector
- Brookfield Asset Management – Financial Services
- Toronto-Dominion Bank (TSX:TD)(NYSE:TD) – Financial Services
- Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) – Utility
- Comcast (NASDAQ:CMCSA) – Communication Services
- Enghouse Systems (TSX:ENGH) – Tech
- Tecsys (TSX:TCS) – Tech
- Fronsac REIT (TSXV:FRO.UN) – Real Estate
- Home Depot (NYSE:HD) – Consumer Discretionary
- Stryker Corporation (NYSE:SYK) – Healthcare
- Raytheon Technologies (NYSE:RTX) – Industrials
(I like all the above dividend-growth stocks but some might not be good buys right now.)
How much of a dividend stock should you buy?
If you have a $100,000 portfolio, a “full position” could be $5,000 (which is 5% of $100,000). When your portfolio grows to $200,000, a full position would be $10,000.
When you’re buying a “starter position” in a stock, you might not be 100% sure of its potential but you want to keep a closer watch on it. Alternatively, you might be very sure of the prospects of the business but you think you might be able to get a better price from watching the technicals. So, you might start a position with $500 or $1,000.
Investors buy “partial positions” to aim to pay for a lower average price on a stock. Depending on the situation, you might buy half a position or buy in thirds (33% of a position). For a more speculative investment, you might even keep it at just a partial position.
By all means, if you pay very low commissions (or none at all) for trading, you can purchase even smaller amounts (e.g. $25) to average into a position.
What if your dividend stocks outgrow your cap?
It’s a first-world problem if your dividend stocks grow to more than 5% of your portfolio. There are different ways to handle this.
From a risk management perspective, some investors don’t allow a stock position to outgrow, say, 10% of their stock portfolio.
Others prefer to hold their winners and let them run because they’re in the camp that believes winners will continue winning.
What’s the right move? Short answer. It depends.
I’ve not sold winners which still sold off during a market crash. However, it’s not necessarily wrong when they pay growing dividends throughout the harsh period and the stock price recovers in a year.
Other times, I sold partial positions of winners. Sometimes, I got the opportunities to add back shares when they sold off. Unfortunately, other times, I miss getting back into them and they run away from me.
Share Your Thoughts
- What’s your dividend stock portfolio building strategy?
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: As of writing, we own shares of RY, BAM, ATD.B, TD, BIP, ENGH, TCS, and FRO.UN.
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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