Monday, February 22, 2016

Diversifying my dividend income ($BNS $RY $JNJ $CUF.UN $SU)

Hello Financial Freaks,

Like most of you guys (or maybe not), I intend to live off at some point from the dividend I make from my investments. It may not represent all of my future revenue but I would like it to be a good chunk. I have no idea how much yet. But since you like datas so much I will give you this percentage: 40 %. That seems about right (yes it does!).

What I do know for sure is where that amount, currently less than 5 K$ (you can check it out here), is mostly coming from.

I hold 22 individual stocks at the moment. All of them pay dividends. But the amounts they pay vary a lot from one company to the other. Not everything is equal when you compare Barrick Gold to Johnson and Johnson or Couche-Tard to Royal Bank of Canada.

Right now I am invested in different sectors of activities : financials, energy, utilities, consumer staple, basic materials, REIT, healthcare, telecom, bonds, etc. (You got more? No you don't!)

The number of holdings and the variety of sectors contribute to my portfolio being well diversified. Is it true in reality ? Or are we talking about diworsifiction as Peter Lynch would put it?

Knowledgeable people have said that you can attain diversification with less than 10 stocks. I believe it to be true.

Take for instance one of my favorite stock, Power Corporation. When you buy POW you buy shares in an already diversified company : you are de facto invested in insurance, financials, energy (through Pargersa which holds Total), booze! (through Pargersa which holds Pernod Ricard) and so on.

Bottom line is : you think you invest only in Canada through Great-West or Mackenzie Placements, you are in fact also investing in Irish Life, Putnam USA and Sagard Investment in China, amongst other things. (aren't you happy about that?)

Same goes for other very well diversified companies like Johnson and Johnson, Couche-Tard or ATCO, to name a few.

If it's important to be diversified regarding your stocks and the sectors they are operating in, it's also very important to find out where your hard earned dividend money is coming from. Because if a stock you own contribute to more than, say, 50% of your dividend income and it goes kaput, it won't matter how many stocks you own because your revenue will still be cut in half. 

For now, it's fine you can easily cope with it as you build yup portfolio. But what about when you are past your prime and are on a travel spree across the World? I guess it's all common sense to think about diversifying your revenue, but in the heat of building your portfolio (finding cheap and great stocks) it might be something that goes unnoticed. 

Some say you should hold a stock that weights more than 5% of your portfolio. I find that rule a little rigid. On the other hand, I would be very wary of owning a stock that contributes to more than 15% of my dividend (unless its JNJ!). 

Right now, 6 stocks contribute to close to 50% of all my dividends. Here are the culprits as seen on my Side Income page:


You will agree that, although 50% is quite high for only 6 of my 22 holdings, it still remain a big number. It these 6 companies have a fallout I might get a real cut down on my paycheque. So I will have to keep a close watch on this. 

I've recently compiled a more detailed chart about where exactly, sectors wise, my dividend were coming from. This easy to consult tool will help me diversify my holdings especially according to where my dividends are coming. Here it is :

Needless to say, the Financial sector has the upper hand. And you don't need to be a rocket scientist to conclude that I will need to add a few more shares from the Telecom sector and Consumer Staple sector. My Energy and Financial sectors respectively contribute to already 30 and 15% of all my dividend. 

What does it tell me about my holdings? Well, it tells me for instance, that a sector like Industrial tend to pay less dividend than the Financial Sector. Should I then hold more shares of Canadian Pacific and Canadian National Railways to make it up? Not sure. 

I guess it's normal to have a bigger portion of my dividend coming from the big banks. It's the way it goes. But, like I said, I should definitely try to lower that percentage by increasing my dividends coming in from other sectors. 

I will therefore keep a close watch on $BCE (Telecom) and try to boost the dividends coming from the Consumer Staple sector. I don't know if it's a trend, but I find Mondelez, Kraft and Couche-Tard to be quite conservative on their dividend policy. Maybe I should add another player. Anyone in mind? (aside from all the big US names such as Coke and Pepsi, which are great, but too expensive at the moment).

What do you think about the diversification of my dividend income stream? Any idea or tips for me?


  1. Interesting to see the mix, MD. I am a big fan of diversification as I find that no one can expect how things will change. Two years ago, you couldnt have to gone wrong with investing in oil/energy companies but now, companies are cutting dividends and their safety is questioned - so, I find that the best course of action is to diversify.
    I find myself leaning a bit heavily towards financials as well - and inside that, a big chunk comes from REITs. I think between traditional financials and REITs - I receive almost a third of my dividend income - which is a bit high -- but like you said, each of these companies (such as POW) itself is diversified.

    Nice post - always good to see articles on diversification.

  2. Thanks for the kind words R2R. You actually gave me the idea to write this post. I know you have a similar chart with a graph where you detail the diversification of your income source. Financials and REITs are the usual suspects, aren't they. It's hard to avoid these guys, but one has to be careful no to rely too heavily on them. Your take on oil is a good example. A lot of people are bummed with Kinder Morgan and COP for instance. Thanks for commenting!

  3. I have never run those numbers, but I think I'd be very close to 45% between financials and energy. Although R2R is much better diversified than I am, I think it's pretty common for Canadian dividend investors to weigh those two sectors quite heavily, along with telecomm.

    Comme tu sais, je ne suis pas vraiment stresse avec la concentration de mon portfeuille. Quand meme, j'ai vendu mes actions en Suncor apres avoir lu leur resultats de dernier trimestre. Peut-etre c'etait un faute...on verra :)

  4. you are right and that's why I am not too worried about my dividend diversification. I would like to add some telecom, maybe some Rogers! ;-)

    tu as vendu tes actions de Suncor???


Thanks a lot for your comment.