Increasing your portfolio diversification

Portfolio Diversification – Improving Your Portfolio With Every Purchase

Every time I make a new investment I am looking to improve my overall portfolio.  There are 3 key measures that I look at in which a dividend growth stock purchase may improve my investment portfolio.  A new buy may improve my portfolio by increasing overall diversification, increasing my current dividend yield or by increasing my dividend growth rate.  Every single time I make an investment I look to improve the portfolio by at least one of these metrics.  If a purchase helps me in more than one metric, then it is even better.

Increase Portfolio Diversification

Diversification involves reducing risk by investing in a variety of assets.  For your overall financial picture this will involve investing in different assets such as stocks, bonds and real estate.  For dividend growth stock investing, diversification involves investing in companies from different industries.  You may want to invest in companies from the oil industry, retail industry or restaurant industry.  There are many industries available to invest in which will aide us in our attempt to diversify our dividend growth stock portfolio.

When I look to make an investment I always look to see what industry the company operates in.  Then I look over my portfolio to determine if I already have investments in that particular industry.  If I do, how much of my portfolio does that industry make up.  I don’t want to have all my stock investments be from one or two particular industries.  For me the more industries I can invest in the more diverse my portfolio is.  With higher diversification my portfolio will have less risk.  This is because not all industries will be affected the same way by different market conditions.  If the oil industry is really suffering, my oil stocks may be going down.  However, my stocks from other industries may still be doing alright or even wonderful.

Increase Portfolio Dividend Yield

Another way I may look to improve my portfolio is by investing in stocks that will help increase my portfolio dividend yield.  One of the goals in a dividend growth investing strategy involves bringing in dividend income.  If I can increase my overall portfolio dividend yield, then I am increasing the income that I am being paid by my companies.

For example, if I have a portfolio of dividend growth stocks that is worth $10,000 and I expect to receive about $350 in dividend income this year then my portfolio dividend yield is 3.5% (350 divided by 10,000).  Now when I am looking at new investments I know that if I invest in any stock currently yielding higher than 3.5% it will raise my overall portfolio yield.  If I decide to invest in a company that is currently yielding 5% then I will increase my portfolio yield.  Let’s say I invest $1,000 in a company yielding 5%.  I will expect this company to pay me $50 in dividend income this year.  My new portfolio dividend yield will increase to 3.64% (400 income dividend by 11,000 portfolio).  This is good because on the whole my portfolio is earning me more income for each dollar invested.

Increase the Dividend Growth Rate

Another way to improve your overall portfolio with a new investment is by increasing the dividend growth rate of the portfolio.  The dividend growth rate is the rate that a company increases their dividend payment from one year to the next.  The higher the dividend growth rate, the faster my dividend income will increase.  If my entire portfolio is invested in companies that don’t increase their dividend at a high rate each year, then I may improve the portfolio by investing in a company that has been growing their dividend quickly over the past few years.  This will increase my total dividend growth rate and help me increase my income quicker.

For example, if the companies in my portfolio are averaging 8% dividend increases annually, I may look for a company that has been increasing their dividend faster recently.  If I then invest in a company that has been averaging 15% dividend increases the past few years, I will expect my overall portfolio dividend income growth rate to increase slightly.  A higher portfolio dividend growth rate means that my income will be growing faster.  I always want to make sure my portfolio dividend growth rate is higher than the rate of inflation.  Ideally I look for a portfolio dividend growth rate of at least 7-8%.

In Conclusion

With every purchase I look to improve my portfolio in one of these three ways.  The more ways I can improve my portfolio the better.  Dividend growth stock investing involves a balance between diversification, current dividend yield and dividend growth rate.  We want to make sure we have a good mix of companies to help decrease overall risk of the portfolio, a good current yield so that we are getting an acceptable income and a good dividend growth rate so we know that income is increasing.  Getting the perfect balance for your portfolio is more of an art then a science.  By trying to improve at least one area with every purchase, you will be sure to keep your investment portfolio heading in the right direction.

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