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How many dividend stocks are enough?

This question ranks right up there with other tortured financial questions:

What is better:  contribute to the RRSP or TFSA first?

What is better:  focus on debt-reduction or asset accumulation?

How many dividend-paying stocks are enough?

It has been written that diversification is the only “free lunch” investors have.   To help with this, every established dividend paying stock an investor adds to their actively managed portfolio, their portfolio volatility decreases.   That’s a good thing, dividend investors need all the help they can get.  As long as the number of diversified stocks in the portfolio increases, to a point, portfolio volatility should decrease and the relative risk for each stock in the portfolio will diminish.   I guess one goal for dividend investors should be to reach a saturation point whereby the addition of one more stock in the portfolio marginally reduces volatility.  To reach this goal, you’re gonna need more than a few stocks I’m sure…

Back to diversification, it is a serious issue for active investors.  Too much weight in too few stocks or too many stocks in one particular sector can cripple a portfolio.   For indexers using Exchange Traded Funds (ETFs), diversification isn’t really an issue; if you own some of the following products, a few companies removed in these ETF holdings are not going to change much of anything in terms of volatility or investment returns:

  • CRQ (iShares Canadian Fundamental Index ETF) holds 89 companies.
  • XIC (iShares S&P/TSX Capped Composite Index Fund) holds 248 companies.

Some giant U.S. ETFs hold even more companies than the ones above, WAY more.   Heck, you could take away 50 or more companies within the following ETFs and never miss a beat:

  • VWO (Vanguard MSCI Emerging Markets ETF) holds 900 companies.
  • VXUS (Vanguard Total International Stock ETF) holds 6326 companies.

There is no way on earth I’ll ever own 6326 companies without an ETF let alone 89 held by CRQ.   This is why I DO invest in ETFs, to take advantage of my free lunch.  However, I also enjoying dining on dividend paying stocks that provide passive and sometimes rising income.  Based on some books and articles written by some very bright people, I think 40 established dividend paying companies are plenty for me.  Here is some support to back up this target:

Lowell Miller author of The Single Best Investment:

“In our portfolios for individuals and institutions we tend to carry thirty to forty stocks.”

“The more stocks you have, the more your group will behave like an index.”

“If you don’t want to hold the thirty to forty stocks that satisfy my personal comfort level, you can reduce the number – bearing in mind that each reduction increases the risk that a single bad apple in your bushel will have an excessive impact on results.”

Gary Kaminsky author of Smarter Than The Street:

“Holding 100 stocks is yet another myth of the great Wall Street marketing machine.”

“If you’re going to do your own work/research, you should feel comfortable that with 25 to 30 names, you have enough diversification and you have enough skin in the game.”

Gail Bebee author of No Hype – The Straight Goods on Investing Your Money:

“A popular rule of thumb asserts than an individual stock should represent no more than 5% of a portfolio.  This would mean owning at least 20 stocks.”

“Some studies of past stock market performance have concluded that owning about 15 to 20 stocks provides the best return for the least risk.”

Stephen Jarislowsky, Canadian billionaire and author of The Investment Zoo:

“Out of the many thousands of stocks I can choose from worldwide, I therefore really only need to look at 50 at most.”

While there will never be consensus on how many stocks are enough, by amateurs or experts alike, I think 40 established companies are plenty for me.

Regarding my dividend investing strategy

I figure 40 companies will be enough because an element within my dividend investing strategy is to review the stocks listed in many dividend ETFs as my starting point.  I figure if some of the biggest equity ETFs in Canada and the U.S. hold many of these companies in their ETFs, I should too.

Take XDV for example.  This ETF is comprised of the 31 highest yielding dividend paying companies seeking to replicate the performance of the Dow Jones Canada Select Dividend Index, based on factors such as stable dividend growth, yield and average payout ratio.  To date, I’ve managed to build a portfolio (on my own) that includes about 50% of the companies held by XDV.  I now own a proxy of this ETF.  Either I can own XDV and pay the MER (0.55%) or I can own many of the companies directly and never pay management fees.  I’ve chosen the latter.

Admittedly, my target of 40 companies might be much higher if I didn’t:

1)      Follow an indexed strategy using a couple of the ETFs above in my RRSP, and

2)      Have a pension plan at work that I treat like secure bond in my portfolio.

For dividend investors, diversification is a serious issue that needs to be reckoned with and should never be dismissed lightly.  Always remember with investing:  “it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.”  – Financial historian, celebrated author and neurologist William Bernstein.

Investors:  How many stocks do you think are enough?   Are 40 blue-chip dividend stocks too few to be successful?   Tell me your thoughts!

Filed in: Stocks

34 Responses to "How many dividend stocks are enough?"

  1. Modest Money says:

    I think when I get into investing more seriously I’d be taking more of a focused approach. I just don’t have the time to properly track and research dozens of companies on a regular basis. By limiting myself I can do more research on each individual buy I make. I plan to aim for 10-20 different stocks at the most.

    • Modest Money, you’ve got some points, but a dividend stock portfolio isn’t that much work to maintain. The dividends make the money! The hardest part is the research, into figuring out what to buy and when. After that, if you’ve chosen a good company, an established company, an established company that has decades of dividends behind them, you shouldn’t be selling the company unless for drastic reasons.

      If you bought Coca-Cola 10-years ago today, and held that stock to today, August 15, 2012 – your return would have been 101%…doubled your money. Has the U.S. stock market done that? :)

  2. I have to agree with Jeremy. I feel like 40 stocks would be overkill. At that point for me, an MER of 0.55% would be worth paying to not have to keep track of and maintain such a large portfolio. Since dividend stocks would represent one part of a diversified portfolio for me, I too would aim for 10-20 dividend stocks to complement bonds and other investment instruments.

    • Yeah, it’s quite a few I know, but it’s not that much maintenance. That MER on a $100,000 portfolio is $550 per year. I wouldn’t pay half that in transaction costs to maintain a dividend stock portfolio, since I wouldn’t be selling anything.

      That said, your comment about holding 10-20 stocks to complement bond ETFs and possibly some other equity ETFs, is a very good approach.

  3. I’m aiming to have 20-30, solid and dependable stocks in my portfolio at any given time. I want to own the cream of the crop of each sector so I spend the least amount of time managing my portfolio.

    I HATE paying fees and would rather own the shares myself, even if the fees are minimal with ETFs. Perhaps I may change my mind when I’m older, but I doubt it lol.

    • Steve, 20-30 is pretty solid. I too, want to own the best of the best, so I also spend very little time doing any research.

      I also HATE paying fees. Every time I pay a fee, it’s money I don’t earn myself :)

      Thanks for your support!

  4. 40 individual stocks is quite a bit. I believe empirical studies show 32 stocks provide 90% of your diversification allocated appropriately across sectors and market cap. I think as an individual investor keeping track of 32 companies might be a nightmare, let alone 40. ETFs and index funds are perfect tools for individual investors who are not professional money managers.

    Also diversification can be a very tricky subject and without the appropriate tools, you may not be as diversified as you may believe.

    • Yeah, while I think 40 stocks is quite a few, it’s across Canada and the U.S. combined and many of them are no-brainers – you wouldn’t have to watch them very much if at all. Say, 4-5 Canadian banks, a couple of lifecos, a few pipelines, a few telecommunications companies, and
      and few oil & gas stocks. In the U.S., take a few of the top holdings in VTI, and you’re good to go!

      That only leaves about 10 stocks to manage, which is not very many.

  5. Mel says:

    What do you mean when you say you treat your pension plan as a secure bond? Does that mean you consider you’re pension as your proportion of bonds in your portfolio and don’t really buy other bonds or bond indexes? I have a defined pension plan through work and I’m trying to figure out/decide how it fits in to the mix while I start an investment portfolio.

    • Hey Mel!

      I mean my pension is like a “big bond”. As such, I consider my pension fixed income, and therefore, I don’t need to have as much bonds in my portfolio as say, somebody without a defined benefit (DB) pension would need to have.

      I do buy bond ETFs, XBB is one of my favourites and I’ve held it for years. I did own some CLF but when CLF got close to $20.50, I made some gains and sold it in favour of buying some big U.S. blue-chip companies.

      I think anyone that has many years (10, 15, and for sure 20+) into a defined benefit pension plan, should consider it a big bond as well and tip the scales in their own portfolio in favour of equities.

      What do you think?

  6. JT Money says:

    At the end of the day my strategy is to buy and hold. So really the only research and tracking required is prior to purchase. Therefore if a stock meets my predefined metrics (and have I the money to purchase it:-)) then I add it to my portfolio. At this stage I have 15, but am always on the outlook to add additional stocks from my watch list or increase my current holdings.

    • Thanks for the comment JT!

      I like your thinking, if you’re going to buy and hold…which I do as well….therefore all the work goes into the purchase, not thinking about the selling!

      15 stocks is a great start, and you seem to be well on your way. Well done.

      Anything on your watch list?

  7. Paul N says:

    About 30, or I would rather look at it as percentages (make your goal to have no more then 3.3% of your overall value in any one security) Maybe if you must, have a favorite or two, then have a few exceptions but may set a rule and limit those to 5%?
    I don’t think 30 well researched quality dividend paying stocks would need to be tracked and researched to death as mentioed above. Just monitored once they are established…

    • 30 is a solid number. I like your idea of keeping all of them to <5% of your portfolio, or, about 3.3%.

      I don’t think you’d need to track 30 stocks. I mean, take the top holdings in many of the biggest ETFs in Canada and U.S., and you could file those stocks away for decades. You’d half to watch about half of them at most.

      Thoughts?

  8. Great post and I loved some of the quotes you included to back up your theory.

    I definitely concur with your final number. I think 40 is a great number, but it would also come with the caveat that the allocation is spread fairly evenly across the board so that 1 stock isn’t 50% of the portfolio and the other 39 share the other 50%. With 40 stocks, you’d have your risk pretty well spread out.

    I currently hold 28 positions and 40 is probably where the train will stop.

    Best wishes!

    • Thanks! Welcome back!

      While I think 40 stocks is quite a few, it’s across Canada and the U.S. combined and many of them are no-brainers – you wouldn’t have to watch them very much if at all. Examples in Canada include:

      4-5 Canadian banks,
      a couple of lifecos,
      a few pipelines,
      a few telecommunications companies, and
      and few oil & gas stocks.

      In the U.S., examples include most of the top holdings of VTI, such as T, GE, JNJ, PG, KO and WMT.

      As for the other 10 stocks after that, those would be the ones to watch, which wouldn’t be many.

  9. Lazy I. says:

    I just checked and I currently own 10 companies + 2 ETF (XIU, XFN)
    10 dividend stocks. I feel pretty safe with half of them being “too big to fall” (PG, MCD, KO, PM, ABT).

    40 is way too much for me!

  10. Lazy I. says:

    I know you don’t own PM :) I did buy it last year and made a pretty good return on it (win some, lose some).

    On another subject, I am curious to know what you think about Jim Rogers latest comment : “If debt continues to rise and money printing comes back stronger, bonds will be a terrible place to be”.

    Maybe a good subject for another thread :)!

    • Ha, you follow my portfolio closely do you? You’re right, no PM, but a few of the others you mentioned. How could I not own those? Those are great companies!

      On the Jim Rogers quote, my response is, is debt continues to rise, those bond holders are indeed in trouble. And more debt will occur, I bet on it!

  11. Hi Mark,

    Exactly the kind of post I was thinking of writing. I’m glad you beat me to it. :)

    I try to aim for around 20 stocks.

    cheers,
    Kanwal

  12. Peter says:

    I think there was research somewhere (Ben Graham Intelligent Investor I think) that says much more than 50 is actually required for true diversification, especially if it is through both Canada AND US stock markets. But then again, you have many index ETF’s, so I wouldnt be too worried. It is just that once in a while, you still get a surprise with one of your holdings: eg. Transalta or SNC.

  13. Mel says:

    @My Own Advisor
    Thanks for clarifying Mark. I agree with that, especially where retirement savings is concerned. I will definitely be investing in some bond indexes, maybe not for the retirement side of things, but rather for some savings towards either a house, car and/or world travel in the next 5-10 years. Savings where I want more interest than a high interest savings account will offer, but I don’t want a lot of risk because in that short amount of time I couldn’t handle losing the capital. Goal specific savings I guess – but since I’m just starting out I consider any savings or investments I have to be part of my “portfolio”. Maybe I’m using the lingo wrong, but gotta start somewhere :)

  14. I’m in favor of 10-30 stocks, but it depends on what a person has in total assets. If the bulk of an investor’s wealth was in those stocks, I’d definitely say higher than that, maybe 40+.

    But if I take myself as an example, I have an indexed lifecycle fund in my 401(k), and then a combination of individual dividend stocks, and some indexed ETFs for support, in my other accounts. I proxy vote for shareholder meetings, and I’m kind of lazy to vote for 40+ companies. I shoot for under 25.

    When I ran a poll on my site asking how many stocks people own, the answers ranged from 0 to over 100.

  15. Carla says:

    Although there is some value in applying “general principles” to dividend investing, I don’t think it really helps people much to tell them “how many” different dividend stocks they should own. That is like telling people that they will be healthy if they eat 40-50 different foods each week.
    There is no replacement for good research. Do your due diligence. This is your hard earned money that you are investing with the hopes of funding a happy retirement or education for your kids. Don’t give your money to any stock just because it pays a dividend. Even if the company has a good track record, you must consider whether the company is going out of style and is pretty much finished in bringing any lasting wealth to shareholders.
    Think long term and invest in companies you believe in and understand. Derek Foster has some good common sense type of advice when he says that he refuses to invest in any company that he doesn’t understand.
    God bless you in your thoughtful investing.

  16. Carla says:

    sorry Lazy I….there is no such thing as being “too big to fail”!!!!
    I would rather invest in some quirky unknown equity that has good fundamentals, then just accumulate the BIG names just because “everybody’s doin it”.

    If the recession has proved anything, to me it would be this….”The so called financial experts can be REALLY really wrong and hurt a lot of really good honest hard working people with their proud assurance.”
    Yes, there is “some” safety in numbers, as both the governments and banks tend to want to bail out the big names if they should happen to fail…..but Americans are losing their patience and tolerance for bailouts…..
    There is nothing better than patient educated research, no more hasty investment purchases without due diligence.

    @Lazy I.

  17. Investeem says:

    Hello, thanks for contributing this post to the Carnival of Investing! This week’s carnival is now up on website.

  18. asx dividend says:

    This is a good breakdown of the various kinds of stocks. I did not see anything about trading bonds, which I feel, is very secure and usually offers a good return of investment.

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