It has been a long time since I reported on my asset allocation. If you have been following the blog for some time now, then you know that I believe that the right asset allocation is important for a dividend portfolio – any portfolio for that matter. Among the academic reasons for a sound asset allocation that covers the right balance between risk and reward which leads to the right level of volatility for a portfolio which also helps determine return, there are other reasons I like asset allocation. In this post I will discuss that reasons and then provide you with an update on what my current allocation looks like.[ad#tdg-embedded]

Why Asset Allocation is Important to Me

One of the reasons I find asset allocation so important is that it helps guide me with what asset class to purchase or even sell at any given time. In my own allocation I have, at a high level, outlined the percentage of Canadian equities, US equities, international equities, and fixed income that I need to hold. I have set a target allocation that I want my portfolio to hold and the process is simply a matter of monitoring which assets are above or below target and taking action.

That action can be either to buy more of the underlying securities making up that asset class or selling some of those securities off. For example, if my Canadian equity allocation is low I might buy some more Royal Bank stock or Canadian value index fund.

From time to time certain asset allocations can be higher that target. I actually rarely sell in this case as I am constantly adding money to my portfolio which then allows me to bring the other assets in line with the overall assets. This helps reduce transaction costs and does not force me to sell securities that I still believe in.

The underlying concept here is that I am taking out a good portion of the emotional aspects of the investing process. It become much more mechanical.

My Current Asset Allocation

This leads to my current asset allocation. Right now it is pretty close to where I want it to be but there is some work to do in both US equities and international equities. I will do a further review but I suspect I will be purchasing some more international equities in the near future. You may also notice that my fixed income is low – I have decided to take on more portfolio risk by lowering fixed income and investing more in equities. Of course, this allocation may not be for you.

Click to Enlarge

I will continue to monitor this asset allocation on a monthly basis and make adjustments as necessary. It has worked for me in the past and I am suspect it will going into the future.

(Photo Credit)

ShareThis

I am in transition now as I make a move from one country to another (back home). That means busy times and a period of transition. Thankfully the market didn’t do much exciting this week. Nonetheless, there of course were still some good dividend investing posts and articles that I managed to read during the down time.

If you have any other quality dividend posts that you came across then please let us all know by using the comments section below.[ad#tdg-embedded]

(Photo Credit)

ShareThis

There is a lot of information on the web that covers how to select stocks, even dividend stocks. In this post I am going to take the negative angle and present what I feel to be three things that I, as a dividend investor, do not want to see in a dividend stock. In my view, if any of my own dividend stocks exhibit any of these traits then that is a red flag which I need to consider acting on.[ad#tdg-embedded]

1. A Very High Dividend Yield

This one is talked about a lot and it has everything to do with risk. Among other things, a dividend yield is a statement of that company’s individual stock risk. The higher the dividend yield, the higher the risk – typically. I say typically because it is not as simple as looking at a company with a 7% dividend yield and saying that it is more risky. Instead, the investor needs to evaluate that yield against the own company’s historical yield patters. If the company has paid a dividend in the range of 6 – 8% over the past 5 years than the 7% is not out of the norm. However, if the yield is normally 3% for that stock and it is now 7% then something is going on with that company and you better figure out what it is.

2. A High Payout Ratio

First, let’s define what the payout ratio is (source: Investopedia)

The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments.

A high payout ratio can spell trouble for that company. Again, this payout ratio must be looked into with consideration given to what the average historical payout ratio for that dividend paying company is.

Typically, a high payout ratio is considered to be in the neighborhood of 60% or higher. Since we are talking about ensuring that the company’s earnings can cover the dividend payment, it makes sense that a company that is paying a high portion of those earnings in dividends can become risky. Especially if that payout ratio has spiked recently. The last thing we want as dividend investors is to own a company that can no longer cover its dividend payments!

3. A Dividend Yield Less than the Market’s Yield

This one will be a bit controversial so I invite readers to chime in using the comments section below.

What I am getting at here is that when you go to buy a dividend stock, then perhaps it does not make sense to buy one with a dividend yield less than the overall markets? Why not simply go out and buy an S&P 500 index fund and get the higher dividend yield right off the bat and cut out your individual stock risk?

As dividend investors who buy individual stocks, we are taking on a higher degree of risks as we are exposed to what is called individual stock risk. Amongst the risks we get from the overall market, economic circumstances, and other factors, we also get the risk of that individual company performing poorly and taking our share price down. As such, it stands to reason that we should be compensated for this risk. One way is to receive a good dividend payment from that company. The higher the dividend payment the better (within reason – see above) to help offset that risk we take.

As of this writing, the SPDR S&P 500 ETF (NYSE:SPY) index is trading at a dividend yield of 2.6%. That would mean that as a dividend investor who believed in this rule you would avoid buying dividend stocks with a a yield less than 2.6%.

Summary

The first two things dividend investors don’t want to see in their dividend stocks are pretty common – a dividend yield that is too high and a payout ratio the company cannot afford. The third – a stock with a yield less than the market – is more controversial in nature and I am not totally sure where I stand on this one yet. I have not done enough research to determine it Perhaps over the long term a company with a higher dividend growth rate will help offset the lower yields. Let me know what you think using the comments.

(Photo Credit)

ShareThis

Now that summer is almost here I am finding the days flying by real quick. In addition, we are moving back to Canada in a couple of weeks so as you can imagine things are a bit hectic right now. However, I still managed to dive into my RSS reader and the various news sites to uncover a number of real good dividend based posts and articles this week. As usual, here they are.

If you have any other quality dividend posts that you came across then please let us all know by using the comments section below.[ad#tdg-embedded]

(Photo Credit)

ShareThis

Dividend investors are a unique and frankly, quite a passionate bunch! Those of us who have research the topic extensively and believe strongly in it’s benefits understand the impacts it can have on our own portfolios over the long-term. As such, I continue to invest in dividend stocks. However, this has created some unique problems not all investors face when building a portfolio based on a strong and balanced asset allocation. One of these unique problems is what to do with those dividends that hit your accounts? Let’s look at that problem in more detail.[ad#tdg-embedded]

What to do with dividend income

This is an interesting (and good) problem to have. What it means is that as a dividend investor it is imperative that you devise a strategy that guides your decisions around the dividends you receive in your portfolio. As your portfolio grows these dividends can be very significant and must be dealt with.

Spend it

There are three options for dividend investors. The first is simply to spend those dividends on stuff. This may be relevant to retirees living off their dividends, but as I am focused on building my portfolio out I will not be doing this. I suspect that for most people reading spending those dividends is not in their best interest.

Reinvest in the Same Company

The second options is to reinvest those dividends in more shares of that same stock the dividend comes from. This can be especially relevant if your broker allows you to hold fractional shares. Most brokers only allow you to reinvest dividends if the dividend is big enough to buy whole shares.

I used to buy more shares of the issuing company – I blindly reinvested the dividends into the stocks that the dividends came from. This is an easy strategy to use and takes the guess work out of it. However, my major problem with it was I was not necessarily putting my money into the best opportunities. At any given time in the average person’s portfolio there are better investments than others. With blindly investing in the issuing company, then you may be buying more shares at a company’s high or worse with a company going down the tubes. This happened to me with Bank of America – I bought more shares as the company was imploding. I also like to look for cheap stocks, but BoA had fundamental issues that I did not want to continue buying into.

Reinvest in shares of other companies

I no longer blindly invest my dividends in more shares of the same stock. Instead, I take the third options and let my dividend accumulate and then invest the dividends in what I view as the best options at the time. Sure, this reeks of market timing but as an individual stock investor that is the name of the game (remember – the basis of my portfolio is built with index funds). Through the constant analysis of my stock holdings and looking for more stocks using D4L’s stock analysis service (aff) I decide which stocks I want to put my dividends into.

Summary

To sum this issue up, neither strategy is necessarily bad. Spending your dividends will work for retirees or people building a portfolio for spending reasons as opposed to accumulation. Reinvesting into more shares of the same stock can be a good strategy if you have very limited time and believe strongly in all our holdings. My choice is investing in other stocks and not necessarily the same company. Most importantly, you need to choose one that works for your and your investment strategy.

(Photo Credit)

ShareThis