Dividend Investments for May 10th
I wanted to let you know that I nibbled on three existing positions today. Two of these companies are higher yielding ones, with lower dividend growth expectations. The third one is a company in the sweet spot in terms of dividend growth and dividend yield. All of those companies look like decent values today. However, the higher yielding ones are with a higher risk as well.
As you may have noticed, in my portfolio I try to be diversified and keep portfolio allocations/risk per position below say 5%. However, I also try to look at sources of dividend income per company. That helps in evaluating risk/allocation per company. I do not want to derive my income from a single company, or be too reliant on it. The risk with higher yielding companies is that even a modest allocation to a stock yielding say 6% may result in an above average weight in dividend income sourced by said company, especially if average portfolio yield is about 3%. It is just something I try to be mindful of.
I also try to think about sustainability of said dividend income, and try to project it into the future as much as I can. A high yield may appear great today for current income, and could provide a good cushion through the ups and downs of the economic cycle (particularly if the industry is somewhat immune from the ups and downs of the cycle). However, I also want to generate total dividend income from the portfolio, which can grow faster than the rate of inflation. This is where companies in the sweet spot as well as those with lower yields but higher expected dividend growth can be helpful in generating high yields on cost in the future. Balancing between yield and growth, present and future, valuation etc is definitely more art than science (it's a balancing act).
In general, future returns are a function of:
1. Dividend Yield
2. Dividend Growth/Earnings Growth
By carefully collecting individual businesses, I am trying to build a portfolio that generates a rising stream of income over time. Each company is a building block that takes me one step closer to the stated portfolio objective. Same goes for each dividend reinvestment as well as each dividend increase. I try to invest with the end goal in mind. I invest in companies with different yield/growth types as explained in this article here.
I added a share of each company below in my retirement account:
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