Dividend investing is one of the most popular ways to invest, but one of the most common questions includes this prevailing question: “How many dividend stocks should I own?”
The answer: It depends. It depends on your dividend investing strategy, the amount of available time you have to monitor your investments and your risk tolerance, among other considerations.
Let’s take a quick dive into the definition of dividend stocks, reasons to consider building a portfolio of dividend stocks and investor-specific factors that can influence the number of dividend stocks you should own. By the time you’re done reading, you’ll have a better idea of why it’s a good idea to hold dividend stocks and the number of dividend-paying stocks you may want to put into your own dividend portfolio.
What Are Dividend Stocks?
First, what are dividend stocks? Dividend stocks are shares of publicly traded companies that offer payouts at regular intervals. Dividends usually come from a company’s net profits, and companies that offer dividends usually have an excellent company track record. Investors can benefit from an income stream (though dividends can take other forms besides straight cash flow) by keeping their money in the stock market over a large number of consecutive years.
Certain dividend stocks, like the Dividend Aristocrats or Dividend Kings, rise up as popular dividend investment options with a long history of offering solid dividends. However, you don’t have to invest in the Aristocrats or Kings in order to benefit from high dividend yields. There are other (often less expensive) stocks that offer a dividend payout that can carve a place in your portfolio.
Beyond investing in individual stocks, you can also invest in mutual funds, exchange-traded funds (ETFs) and other dividend-appreciation funds. Here’s a quick definition of both mutual funds and ETFs:
- Mutual funds: Mutual funds are bundles of stocks pooled by many investors into a professionally managed portfolio of stocks, bonds or other investments. They are devoted to a specific asset class or investment sector or type.
- Exchange-traded funds (ETFs): ETFs are a basket of securities, such as stocks and bonds, that track an underlying index, such as the S&P 500 index.
Let’s take a quick look at an example using Johnson & Johnson’s current quarterly dividend.
Let’s assume that Johnson & Johnson will pay out a cash dividend for the first quarter of 2022 at $1.06 per share. Let’s say you own 100 shares of Johnson & Johnson, which you bought at $182.75 per share. Your total investment would have been $18,275.
A cash dividend of $1.06 per share means you get a quarterly cash dividend of $106, using simple math: (100 shares x $1.06).
When you’ve decided on the right type of dividend-paying stocks for you, it’s easy to get started investing. Ask a financial advisor to help you open an account or open a brokerage account on your own (if you don’t already have one). Determine the amount you’d like to invest each month. You can set up your bank account information through your brokerage and also set up direct deposit to your dividend portfolio account. Choose stocks that fit your dividend investment strategy and buy the shares of dividend stocks that you think will fit your specific needs.
Reasons to Build a Portfolio of Dividend Stocks
Owning just one type of dividend stock might give you an income stream, but is it likely to carry you through, say, your retirement? Do you want to sink your money into just Johnson & Johnson, for example, or is it best to invest in a number of companies that can give you wide dividend growth? There are some compelling reasons to build a portfolio. Let’s take a look at some reasons you might want to build groupings of dividend stocks into your portfolio.
To put it bluntly, investing in just one or two companies doesn’t give you diversification. Diversification means that you mix together a large number of investments within your portfolio. It’s one of the top financial goals that many investors strive for when they invest.
Even if you invest in what you perceive as a “low risk” company like Johnson & Johnson, your returns will look different than what a wide variety of investments can return when put together. A lack of diversification puts your portfolio at risk for significant volatility. Putting all your eggs in one basket can cause you to lose all of your money — again, even if you invest in a “good” company.
On the other hand, if you buy a handful of companies, companies that do well can make up for companies that experience dips in the market. This way, you don’t have to rely on just one stock to provide you with dividend income. Different companies help you weather different issues in the stock market.
Putting together a widely diversified portfolio can be like a vanguard in the military, guarding against the volatility and risk you’d experience if you had only sunk all your money into one fund.
You can eliminate a total of 61% of stock risk by owning 200+ stocks (which you can also achieve through a stock index fund) or eliminate 56% of risk with just 20 stocks from several sectors, according to the Institute of Business and Finance.
It’s a good idea to guard against gravitating to specific brands yourself or investing in just consumer staples or health care. You might think you have plenty of diversification by investing in a lot of companies within a particular sector.
However, owning a wide variety of stocks within the same sector doesn’t offer adequate diversification because if you choose stocks from just one sector, you could underperform in the market. As a rule of thumb, you may want to try to keep your stock portfolio at a limit of only 25% of your portfolio in a particular sector. Stick to areas of the market you are comfortable with and use common sense as you look to diversify.
It’s important to remember to check the fundamentals before you invest in passive income like dividend stocks. Check a company’s debt levels, business model, sector conditions, healthy free cash flow generation and more.
Potential for More Consistent Returns
As a dividend investor, are you interested in more than just your dividend cut? Absolutely. You want to know how well your investments will provide investment returns. The amount of financial leverage in a stock dividend portfolio can be greater if you plumb your portfolio with a wide variety of holdings.
Combining various assets of different risk levels can help you see higher returns, even during turbulent markets. For example, let’s say you had invested in just one oil company in 2020. Your investment may have seen some dark days as U.S. crude oil production fell by 8% in 2020, the largest decrease on record during one year.
Wide Market Capitalization
Historically, large-cap stocks will see less stock price volatility than small-cap stocks. You can hit the right mix of large- to small-cap stocks when you blend various investments.
What are large-, mid- and small-cap companies? Large-cap companies typically have a capitalization of $10 billion or greater. Mid-cap companies have a capitalization between $2 and $10 billion and small-cap corporations have a capitalization between $300 million and $2 billion.
It’s important to note that not all small-cap companies offer dividends because they’re in the growing phase of their business. However, you might be surprised by the number of small- and mid-cap companies that offer dividends despite the level of liquidity they have compared to large-cap companies. (Remember, the bigger the company, the more buyers and sellers there are to trade.)
Having a wide variety of market caps can help guard against volatility in your portfolio.
How Many Dividend Stocks Should I Own?
Unfortunately, there's no one answer to this question. There are certain investor-specific factors you may want to consider before you choose a “number” for your dividend investing strategy. You may want to consider your ability and availability to do wide research into your investments, your individual risk tolerance and your specific investment goals.
Some investors might feel comfortable managing 60 stocks, whereas some investors might want to skip scouring balance sheets and stick their money in dividend ETFs — these can be much easier to manage. The best way to approach investing may be whatever offers you a good balance of diversification, low trading costs and the right mix that helps you hit your goals.
The number of dividend payers you own might look different from another investor’s, and that’s because personal finance is just that — personal finance. So don’t look to your neighbor, your best friend, your parents — whomever! — to help you determine how to build your portfolio. It should depend on your specific needs and goals.
Every investor has a unique opinion on how many dividend stocks are the “right amount,” but some well-placed investment advice may help you make the right decisions about your investments.