Build Your Own Dividend Stock Diversification Plan
Image by Pixabay
Need to play it safe?
A dividend stock diversification plan is nothing more than a simple way to protect your portfolio.
The common sense balance gives you safety and performance. And it takes the edge off volatility. It softens the wild swings. The extremes of the market’s highs and lows are balanced with consistency.
How does a dividend stock diversification plan work? Easy.
First, round up some suspects.
How To Find The Best Dividend Stocks
To find the best dividend stocks, check out my article The Best High Dividend Stocks For 2015.
Put together a list of stocks you like. Make the list longer than you need. Some of these stocks won’t make the cut for your dividend stock diversification plan. This doesn’t mean they’re not good stocks. They just don’t fit your plan.
Once you’ve got your list, there are two things about each dividend stock you’ll want to identify.
One is the yield. The other is the stock’s business sector.
You want to make sure you…
Build Your Dividend Diversification Plan On Different Sectors
Balance sectors and you’ll always be invested in an industry that’s doing well.
Avoid the trap of being too heavy in one industry. When your energy stocks are on the skids, healthcare stocks could be flying high.
This blend of different business sectors can help protect you from the worst market downturns.
You’ll also be ready to capture the upside when an industry gets on a roll.
Let’s say one of those influential analysts on CNBC declares he’s suddenly fallen in love with personal product stocks. You know the story… everybody rushes in.
But you’re already there. You’ve already grabbed the uptick.
Here’s another reason why you want different industry sectors.
Times change. Not long ago, investors focused on utilities for their dividend stocks.
On today’s lineup of S&P 500 Dividend Aristocrats, you’ll see the shift.
Here are five industries where more than one Aristocrat stock has paid growing dividends for more than 25 years:
- Property & Casualty Insurance
- Medical Instruments & Supplies
- Diversified Machinery
- Personal Products
- Specialty Chemicals
What if the specialty chemicals business runs into trouble? You’re covered, because your insurance stocks could pick up the slack.
And there’s a second kind of balance to build in…
Build Your Dividend Diversification Plan On Different Yields
Don’t chase yield. It never seems to work out. It’s a fool’s game, like chasing last quarter’s top performing mutual fund.
Today’s high yield dividend stocks can easily turn into tomorrow’s dividend deadbeats.
To find out how to steer clear of these high yield heartbreaks, read my article, High Yield Dividend Stock Disaster.
Build your dividend diversification plan on a combination of yields. The longer your investment horizon and the higher your thirst for risk, the more high yield stocks you can sprinkle in.
Take a pass on any yield above 10%. Those kinds of high-flying yields have a way of falling back to earth, no matter how appealing the stock seems to be.
It’s a risk you don’t need to take, because over time, the lower yield that steadily grows will take good care of you.
Want an example? Here’s a company most people have never heard of.
Genuine Parts Company (GPC) has been paying a growing dividend since 1957.
It was slaughtered in the 2008 bloodbath. The stock price was cut in half.
But it kept on paying a dividend. And folks who reinvested those dividends and bought more shares of Genuine Parts when the stock was down below $30 scooped up a bargain.
Look at how Genuine Parts has been doing since it got sliced up in 2008.
It’s more than quadrupled.
But here’s the thing.
After the 2008-2009 slaughter, Genuine Parts kept paying the yield.
It didn’t miss a beat.
See the chart for 2009? How the stock tanked in the first quarter?
Well, during those dark days the dividend went up.
And it kept going up.
Over the long haul, your diversified dividend stocks will bounce up and down. Some of them might go on a tear like Genuine Parts.
But some won’t. And that’s OK…
If they keep paying dividends.
This is why you need a dividend stock diversification plan. It doesn’t have to be fancy, but it does need to give you some balance.
Balance between industry sector and yield.
Want More Proof Diversification Works?
When the market tanked between January 2008 and February 2009, diversified portfolios were down 35.0% and all stock portfolios were down 49.7%.
Then, when the market took off again between March 2009 and February 2014, diversified portfolios were up 99.7% and all stock portfolios were up 162.3%.
Now here’s where it gets interesting. We’ll combine the bad times and the good times, and see how a diversified portfolio stacked up against an all-stock portfolio between
January 2008 and February 2014.
The all-stock portfolio performed best, but not by much… a total return of 31.8% compared to 29.9% for the diversified portfolio.
The Next Step For Your Dividend Diversification Plan
Round up the usual suspects.
Get rid of stocks with a 10%+ dividend.
Get rid of the stocks with a dividend payout ratio that’s up over 50%.
Shake down the rest. Group them into different categories by yield and industry.
Resist the temptation to chase yield.
And you’re in business.
You’ve put together a dividend diversification plan that’s going to give you extra protection from volatile markets, and the best shot at capturing solid returns.
—————————–
Genuine Parts (GPC)
Dividend Yield: 2.47%
Annual Payout: $2.30
Payout Ratio: 49.9%
P/E: 20.66
Regards,
Michael Jennings
Note: Michael Jennings writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at https://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Category: Dividend Basics
