Why Dividend Portfolio Diversification is Important
When putting together a dividend portfolio, it is important to remember to diversity. In some cases, it can be tempting to chase the high dividend yields related to certain sectors. However, as many found out during 2008 and 2009, putting too many of your dividend eggs in one basket can create serious problems.
When a Sector Runs Into Trouble: Dividend Cuts
Some dividend sectors are popular due to their high yields. REITs, utilities and financials are good examples. Financials provide an especially apt example of the need for diversification in a dividend portfolio. Prior to the financial crisis, banks were viewed as Titans among dividend stocks. They paid reasonably high dividends (that always seemed to be rising), and they provide decent capital gains.
However, as trouble began brewing in 2007 and 2008, dividend increases slowed to a crawl. After the financial crisis, which hit banks quite hard, dividends were slashed in 2008 through 2009. For those heavily invested in bank stocks not only saw huge losses in terms of capital as stock prices dropped, but they also saw a reduction income as dividends dwindled away.
Of course, this is something that can happen in any sector. As a result, it is important to consider diversity in your dividend portfolio Consider ways to include dividend stocks from a variety of sectors, and consider including a health mix of dividend aristocrats. This way, if one sector verges on complete collapse, you aren’t as devastated by the results. You are especially vulnerable if you count on dividends for income.
Diversifying Your Dividend Portfolio
As you diversify, make sure that you are considering quality stocks, and that you include a mix that will help you meet your goals. Pull from different sectors of the market, and you can also add diversity with dividend funds and foreign dividend stocks. There are a number of ways that you can add a little diversity to your portfolio and still enjoy a stable income stream and limited risk.
Be sure to do your research and analyze the stocks you include. You want good quality stocks in your dividend portfolio, ensuring that you have solid choices that are unlikely to see big drops in payouts at the first sign of trouble. If you have a little extra room for the risk, though, it might not be a bad idea for your diversity to include some good growth dividend stocks with a little more risk. Just make sure that you are balanced out elsewhere so that if your bet turns out to be a bad one, you aren’t devastated.