Welcome to our monthly passive-income portfolio (PIP) update—#16 in the series! Before we get to the October update, I wanted to take a moment to share our take on the important question: What’s the right size for a new dividend-growth portfolio?
Specifically, I want to address size in terms of how many positions you should start with in your DGI portfolio. I see so many folks out there recommending starting with 5 stocks for portfolios under $10k. While I respect many of these people tremendously, I couldn’t disagree more with their advice regarding this particular question.
They typically argue that (1) you don’t get enough bang for your buck by adding more positions and (2) the transactional costs with more positions are excessive for a small portfolio. While there was some truth with these arguments in the past, they no longer valid with the rise in investing platforms offering both free trades and fractional shares.
Let’s look at three reasons I recommend starting your dividend-growth portfolio with 15-20 stocks!
The first reason you need to start your dividend-growth portfolio with 15-20 stocks is that a portfolio with fewer stocks simply does not provide you with enough diversification.
There are two primary sources of risk that investors must contend with: systemic and specific. Systemic risk is the volatility inherent in the broad market. This risk is priced in and cannot be mitigated without looking outside of equity assets.
Specific (or idiosyncratic) risk is the risk associated with a given company or smaller group of highly related stocks (e.g., an industry). Unlike market risk, idiosyncratic risk is not priced into the market, but it can absolutely be managed through effective diversification.
For long-term investors, not only can market risk not be mitigated but it is immaterial. It is specific risk that we need to be focused on. Thus, adequate diversification is a non-negotiable for dividend-growth investing.
As noted, five stocks do not provide enough diversification to effectively minimize idiosyncratic risk. It doesn’t matter if you start your portfolio with $100, $1,000 or $10,000—you need to manage the risk that matters!
Here’s a simple chart showing the impact of positions held in a portfolio on the amount of inherent specific risk in that portfolio:
As such, the absolute minimum number of holdings you should start with would be around ten. To take advantage of sector rotation, that would mean you should start with a minimum of 11 (one per sector). However, several sectors are broad, and I recommend selecting a company in two or three unrelated industries within those sectors. This brings the minimum number of stocks up to 15-20, which will provide you with adequate diversification as you build your portfolio over the first 2-3 years.
To learn more about managing portfolio risk, I encourage you to read Idiosyncratic Risk: Is Your Portfolio Really Protected? and 9 Sure-Fire Signs You’re NOT a Long-Term Investor (specifically, sign #8).
As I mentioned in the intro, one of the traditional arguments in favor of starting portfolios under $10K with 5 stocks is that you don’t get big enough dividend payouts from smaller position sizes.
However, this is a fallacy—especially when you can capitalize on fractional shares. Why? Because paid dividends only matter at the portfolio level!
The size of individual dividend payments is irrelevant. It makes no difference whether you have 1 stock that pays an annual dividend of $10 or ten stocks that pay an annual dividend of $1. Your total dividend payments—and therefore your portfolio yield—will be the same either way! (But the second option will provide way more risk mitigation)
When it comes to efficiently, we need to be focused on yield. A $10 dividend could be strong or weak. We need a ratio—specifically yield—to provide us with more information. A yield tells us how efficiently our capital is working for us. Furthermore, it is our overall portfolio yield that really matters. It tells us how much dividend income we can expect to generate from our portfolio for a given level of capital investment.
Again, all that matter is your portfolio yield—which is based on your aggregate dividend payouts.
The more efficiently you invest your capital (i.e., higher portfolio yield)—the more dividend income (dollars) you will generate. But again, it doesn’t matter how you break down that income on an individual holding basis.
When I look at monthly dividend payments, I look at the aggregate amount. If I receive $100 in dividend income for the month, I don’t care if certain positions only paid me $1. What matters is that it all aggregated together to be $100 in total dividend income.
Furthermore, the ability to invest in fractional shares (such as with M1 Finance) enables you to divide your portfolio into as many positions as you would like without worrying about share price. Thus, there is no reason not to build in an effective degree of diversification from the start with 15-20 positions.
An important corollary to this is that the number of holdings no longer increases your portfolio cost (expense). In the past, when you had to pay commissions, it may have made sense to limit the number of trades you executed to reduce your investing cost (i.e., a smaller number of positions in smaller investing accounts).
However, nearly all investing platforms now provide commission-free trades (such as M1 Finance). This further eliminates the need to limit your portfolio to a small (risky) number of positions when starting out.
The third reason I recommend starting your DGI portfolio with 15-20 (rather than 5) stocks is that when you limit the number of positions in your portfolio, you limit your opportunity to build it.
With income investing, we want to deploy our capital as efficiently as possible. This means we want to build positions as they provide us with value opportunities—both in terms valuation and our cost basis. We want to reduce our cost basis whenever and wherever possible (increasing our position and portfolio YOC).
The problem with only having 5 stocks in your portfolio is that your options to do this are limited and you are frequently forced to deploy new capital less efficiently.
For example, what if your five stocks rapidly rise in price over the first year? You would have to either (a) sit on cash while waiting for opportunity or (b) invest it at a higher cost—raising your cost basis and lowering your YOC.
While it is important to track our dividend income, it only provides us with half the picture. For example, my dividend income may be increasing (as I add additional investment capital), but the efficiency with which I’m investing it may be declining due to a lack of opportunity. That’s akin to a company that is showing growth on its topline, while its margins are slowly eroding. We need to manage our margins—not just focus on the dollars!
With 15-20 stocks in your portfolio (spread across sectors/industries), you are highly likely to have positions where you can deploy your new capital efficiently—lowering your cost basis and raising your YOC.
Building a new DGI portfolio is not an overnight accomplishment. The initial building phase typically requires 3-5 years. Over that time, 15-20 stocks will provide you with opportunities in most of your holdings to efficiently add position size. Over time, your portfolio will naturally balance itself and provide you with a high-level of capital efficiency.
Furthermore, by maintaining adequate sector coverage, you can naturally capitalize on sector rotation opportunities. To learn more about this, checkout my article Sector Rotation: The Case for Dividend-Growth Portfolio Diversification.
And finally, if you get a lucky rocket ship or two out of those 20 stocks, you can simply close the positions, book the profit, and reinvest it in your other 18 or 19 stocks. Despite being the right thing to do, it is much more difficult to do it when you only have 5 positions!
As we have seen, the old advice to limit new dividend-growth portfolios to a few holdings (typically around five) no longer holds true. Three reasons we recommend beginning with 15-20 stocks are:
It’s also important to note that 15-20 positions is a comfortable number that shouldn’t overwhelm the new investor. In fact, if you simply spend one hour each week reviewing the fundamentals of two companies in your portfolio (30-minutes each), you could review 24 stocks each quarter—a perfect number for a beginning portfolio.
Now let’s get our weekly passive-income portfolio update…
We’ve received some recent feedback from the community requesting access to our trades. While we provide an enormous amount of transparency with our public portfolio updates, we do not provide specific trade information.
Before we delve into the October numbers, I think it’s important to review why we don’t want to highlight specific trades. The reasons stem from why we have a public portfolio:
What we do NOT want to do is SELL FISH. To learn more about why we don’t want to do this, please read our article Dividend-Growth Investing: Why You Should Never Buy a Fish!
We don’t want you to try and copy our portfolio. It simply serves as an example. We want you to take the information we share through our “learning” articles and portfolio updates… and shape it to fit your own unique style, approach, personality, and risk profile/tolerance.
There is no one “best” way to dividend-growth invest—let alone invest in general. You have to find what fits you and works for you. We provide a plethora of important and effective building-blocks. Pick the ones that appeal to you and build an amazing portfolio that’s all YOU!
If you do that, you’ll likely be far more successful over the long run… and definitely happier!
With that cleared-up, let’s take a look under the hood of our passive-income portfolio and recap the month of October!
As we close out the month of October and our 33rd week, we currently have a portfolio value of $4,427.63—up from our starting value of $500 on March 13th.
In terms of market performance, we are up 1.6% since inception, up 2.5% over the past quarter, and up +3.4% over the past month.
As we always emphasize, this is both (1) an income-investing portfolio and (2) a long-term investing portfolio. As such, capital gains/losses are only a secondary performance metric. Your focus should always be placed primarily on income metrics!
Your primary goal is to build passive income. Market volatility should simply be viewed as potential opportunities to deploy your capital more efficiently and generate more income over the long run.
Here’s where we are at in terms of income metrics…
We have earned $119.97 in dividends since inception, $84.79 over the past quarter, and $40.19 during the past month.
Dividends continue to trend in the right direction with basically 66% of our earned dividends coming in the last quarter (representing 36% of the portfolio’s lifespan).
In terms of dollars, here’s a look at our paid-dividends trend:
Our yield-on-cost (YOC) has remained around 8.3%, while our current yield is at 8.5%.
Below is a graph of our YOC and current yield since inception. From a portfolio-level perspective, anytime YOC is below the current yield, it’s a targeted buy zone—there is opportunity to increase our capital efficiency (i.e., raise our YOC).
This indicates that we are deploying our new capital about as efficiently as possible with this portfolio.
As we always note, we utilize an opportunity-focused portfolio allocation approach—one that seeks to deploy capital (both new and reinvested) with the greatest efficiency possible.
Over the past few months, we have had a lot of opportunities to build positions with better capital efficiency. This has shifted our distribution to the right (a good thing). However, we still have some great opportunities at the moment. Below is a chart of our portfolio’s current yield-variance distribution—showing where we are currently deploying capital.
To wrap up, here are our current allocations by holdings, capitalization, asset type, and sector:
Additionally, here are our allocations for our two sectors that include additional industry/type subsets:
We hope you’ve enjoyed this week’s update on our public-view dividend growth portfolio and my always-opinionated (but usually valid and hopefully beneficial) discussion!
You can always view our Wicked Capital dividend growth portfolio at https://m1.finance/1zUclN2JL
If you’re interested in starting an M1 Finance portfolio, please consider using our referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!
That’s just one more reason to start your dividend growth investing today! It’s never too soon to start working towards your financial freedom!
If you’re interested in dividend growth investing—you’re in the right place! We focus exclusively on helping others be as successful as possible with this approach and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!
Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that portfolio with a solid process and winning mindset!
Remember, if you are starting a new portfolio, (1) we recommend 15-20 stocks and (2) understand that it will take 3-5 years to properly build-up your portfolio and find a natural allocation balance.
It’s not an overnight, instant-gratification process! Furthermore, your allocations will likely get skewed early on as you invest capital into the most efficient vehicles (positions). These investments will represent a high percentage (margin) of your overall portfolio capital. As you build your portfolio over time, the margin will reduce, and opportunities will rotate through your holdings.
The key is developing, understanding, and consistently sticking to your process!
This is why we are not here to sell you fish. We don’t want you to copy our exact moves and we don’t want to influence your own investing theses. Rather, we want you to learn to successfully invest for yourself!
Always remember, investing involves substantial risk of loss and is not suitable for everyone. The valuation of investments may fluctuate, and, as a result, you may lose substantial amounts of money. No one should make any investment decision without first consulting his or her own financial adviser and conducting his or her own research and due diligence.
You should not treat any opinion expressed on the Wicked Capital website as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion for entertainment purposes.
The opinions are based upon information we consider reliable, but neither Wicked Capital nor its affiliates, partners and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.
Past performance is not indicative of future results. Wicked Capital does not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website.
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