Dividends and Your Company Stock
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Each month I buy shares of my employer through a share purchase plan. This happens automatically for me – the money is contributed on my behalf to the broker and the shares are subsequently purchased. This is a great program as it is money above and beyond my salary and other earnings. It is also an added bonus that my employers stock also pays a dividend. This dividend is not huge, but it still can throw off some good cash flow if I let it. The only problem is that I do not want my company stock holdings to get too large, therefore I somewhat limit the dividend payments I receive.
Too many people have too much money in their company plans which opens them up to too much risk. Although from a study done 2-years, this article from USA Today highlights the problem:
On average, employees have 21.9% of their 401(k) money invested in their employer’s stock, according to a 2006 report by Hewitt Associates, the human-resources consulting firm. One in five plan participants have at least half their retirement money invested in company shares, Hewitt says.
Remember Enron – what would happen if your company ran into trouble and your stock became worthless. With 20% of a portfolio made up with one company then the individual security risk is high and a portfolio like this stands to lose a great deal of money. With my company stock holdings, I break my rule to never sell and periodically liquidate some of my shares to be sure that no one stock makes up over 10%. This helps limit my downside should something happen. Even with a consistent and rising dividend, this become important.
So, if you are fortunate to receive company stock then I encourage you to have a look to see what percentage these shares make up within your overall asset allocation. Be sure to include any vested stock options in this value as well. If it is too high then it might be time to liquidate some and buy some other dividend growth stocks. It does not mean you have lost faith in your employer (I am very bullish on my employer), it just means you are practicing good portfolio management principles.
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8 Comments on this post
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Drizzt said:
It not just about blowing up in a big way! Take my example of my company shares. didn’t explode to a huge extent but nevertheless if u are going to leave a company it gives u little flexibility as well.
http://www.investmentmoats.com/value-investing/st-engineering-might-not-be-as-cheap-as-you-think/
July 23rd, 2008 at 9:27 am -
Stock Market Books said:
TDG,
If your company stock takes that much %-age of your portfolio, why don’t you simply stop contributing?
Are you getting a discount for buying the stock through your co’s stock plan? Is there any minimum holding period?July 23rd, 2008 at 10:28 am -
Echo said:
TDG have you ever done an analysis ofyour company’s stock – I’d be interested in how it ranks using your criteria. BTW I currently work at the same company on contract – so I don’t get these little perks
July 23rd, 2008 at 8:27 pm -
Dividends4Life said:
Great read! As I have confessed, this is something that I am working on in my portfolio.
Best Wishes,
D4LJuly 24th, 2008 at 11:23 am -
Bob said:
My company has a ESPP also but when I found out about DSPP I did sell some of my position in company stock to reinvest in other companies. This way I do not have all of my eggs in one basket. At this time 14.58% of my portfolio is still in my companies stock and I still invest $40 a month with them through payroll deductions, but I also invest $250 a month into other companies with direct purchase plans, this way my over all percentage will drop.
July 24th, 2008 at 9:05 pm
[...] The Dividend Guy cautions against loading up on company stock just because of the match. [...]
[...] Here is how the portfolio looks right now – as you can see I have some work to do to get things in line. That will come with time. The large-cap growth is way out of whack because of a recent stock award I received from my employer. I will focus on bringing this down over time as I strongly beleive it is a huge mistake to hold a disproportionate amount of employer stock. [...]
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