Last update: 2019-09-19

Dividend investing portfolio diversification

As I described earlier, the world of investment is something that fascinates me, and I believe the easiest way to grow a passive income is with Dividend Growth Investing (DGI). There's a lot of people with varying opinions on the value of dividends, with some people saying it's a great technique, and others saying that dividends take away from a company's bottom line and they should be completely disregarded. I obviously believe in DGI, because from what I can see, while it's true that any time a company pays a dividend to their shareholders the money is reduced from their overall value, the stock price of a company isn't based solely on a company's intrinsic value. Stocks are priced according to offer and demand, which is only loosely based on value, and mostly based on forward projections, rumors and emotions.

However, it's not because I focus on high yield dividend stocks that it means I can't have a diversified portfolio. As of September 2019, I only have stocks from 9 companies and as a result, I don't have positions in every sector of the market. Here is how my positions look so far:

I currently own: BCE, BNS, CAR.UN, CNR, CU, ENB, NWH.UN, REI.UN, TD

As you'll notice, I tend to focus on a few specific sectors. In real estate, I own a number of REIT stocks. REITs tend to have high dividend yields, and they typically do well even during a recession, because most of their income comes from rent. Even in a recession, people have to pay their rent. Financial stocks are the basis of the economy, and tend to do well over time, while energy is a sector that can be much more volatile, but the growth can also be tremendous, so it's useful to have a presence in this sector. Some sectors I intend to grow in the future include utilities, since these companies tend to be large blue chip stocks with long term performance, and consumer goods, because again even in a recession, people need to buy groceries and buy clothes.

If you'll notice, I don't invest in technology, despite actually working in the sector. There's two reasons for that. First, most tech companies are more recent and don't offer dividends, so they aren't an option for me. Also, the tech sector moves very fast, which is good for day traders, but not so good for growth investors. The goal for me is to build passive income over time, and I can only do that with stocks that I can buy and hold. Put another way, what is more likely to still be useful to the world's economy in 20 years, a search engine or a home? Search engines are already starting to be replaced by social networks, which may get replaced by some other thing in a few years. Things like food, utilities, homes, energy... these will remain relevant for a long time.

Another point to note is that my dividend portfolio is 100% Canadian stocks. While I try to keep a diversified portfolio when it comes to market sectors, there's two reasons why I keep only Canadian stocks. The first has to do with currency exchange, where I would need to exchange our weaker dollar for USD plus the 1.5% fee my broker charges to buy US stocks. The second is related to taxes. Dividends from US companies are taxed 15% by the US government, plus whatever taxes the Canadian government charges (depending on the type of brokerage account I use). Meanwhile Canadian dividends are taxed at a reduced rate. This isn't to say I don't have exposure to foreign markets. I also invest in a mutual fund and retirement account that both have US and international positions.

I invest money once a month, and every time I research each company that I currently own, along with any new ones that came up during the month based on recommendations, news reports, etc. I then pick stocks based on a number of criteria, while keeping the overall balance of the portfolio in mind. It's been shown that a diversified investment is more resistant to volatility, which is a good thing.

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