Like so many investors who actively invest in dividend stocks that have a very long track record, I got really burned in the this most recent market downturn. I was lured into the perceived safety of long term dividend growth stocks – especially when it came to financial and banking stocks. For example, at my peak I held shares in the following banks and financial stocks: Citigroup, Bank of America, Royal Bank of Canada, IGM Financial, and U.S. Bancorp. This got me into trouble and highlighted a major problem with dividend investing.[ad#tdg-embedded]
The problem I am speaking about is one that plagues all investors who takes an active approach to their portfolio and invests in individual stocks. The issue is ensuring adequate diversification. Even as an investor who built a core portfolio of index ETFs and then only supplements with dividend stocks, I took on a larger loss than I perhaps should have because my individual stocks were much too concentrated in the banks.
How did I get to have this problem. As I look back on it, it really is quite simple. Some of the longest standing dividend payers and dividend growers were Citigroup and Bank of America and I was buying into that strong yield and strong growth. As a dividend investor, this is what we are really trying to do – achieve that fantastic long term growth that comes from a growing dividend. This lured me into a false sense of security in these securities and I got burned.
I have learned a strong lesson from this. I am still investing in individual dividend growth stocks, however I am ensuring much more diversification. True to my investing code, I sold the stocks that cut their dividends (U.S. Bancorp, Citigroup, Bank of America) and have focused those funds on ensuring overall good diversification in my portfolio. I also pledge to never hold more than 2 stocks of any one industry in my portfolio, much preferring to hold only one. I hope this will help my portfolio grow in the future and will shield me from dramatic problems in one given industry. Time will tell.