How many dividend stocks are enough?
This question ranks right up there with other tortured financial questions such as:
How many dividend-paying stocks are enough?
It has been written that diversification is the only “free lunch” investors have. To help with this, the theory is 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.
This means for dividend investors like me, this can be a serious issue for active investors. Too much weight in a few stocks OR too much weight into just a handful of stocks can cripple a portfolio.
Let’s look at a few popular Exchange Traded Funds (ETFs) current to the time of this post:
- 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.
How many dividend stocks are enough?
Based on some books and articles written by some very bright people, I think between 30-40 established dividend paying companies are enough for me. Likely 20 or so from Canada. Max 30 stocks. The rest of the stocks would come from the U.S. Likely 10-15 U.S. stocks are enough focused on the consumer industry and healthcare sectors in particular.
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.”
How many dividend paying stocks are enough for me?
I figure between 30-40 Canadian companies will be plenty because an element within my dividend investing strategy is to review the stocks listed in many dividend ETFs as my starting point.
Take ETF XIU for example. This ETF is comprised of the 60 largest companies in Canada.
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!