Dividend Portfolio Allocation Strategy
How to build your dividend portfolio allocation strategy

Building a dividend portfolio doesn’t need to be complex. You probably want to set yourself up for excellent growth while at the same time protecting your investments from severe losses. If that’s the case, then you need to consider two important things as part of your dividend portfolio allocation strategy:

  • a well diversified set of dividend growth stocks
  • a fail-save mechanism in case an investment turns south

Consistently dollar-cost-averaging in undervalued dividend stocks and reinvesting the dividends will then allow you to reach your early retirement date as planned. The true power is really in the compounding effect.

Calculate your own financial freedom date

So let’s therefore talk about my dividend portfolio allocation strategy today.

It’s not something which I have designed over night and it is the accumulation of reading tons of information and 6 years of dividend growth investing experience.

#Recommendation:
make sure to first build an emergency fund and pay-off all your high interest debt. I consider those the necessary pre-steps before starting your investment journey.


My dividend portfolio allocation strategy

There exist many well known strategies regarding portfolio allocation. An example of such popular strategy is the bond/stock ratio and it uses your age to calculate your ideal allocation to stocks versus bonds (100 minus your age).

I believe that such a strategy could be really good for you and who am I to challenge it? I’m not an economist who gained a PHD on this topic πŸ˜‰

But today I’m rather talking about the stock part of the allocation strategy and I’m ignoring investments in other asset classes like bonds, real estate and saving deposits. Just for the simplicity of this article.

Having said that, the dividend portfolio allocation strategy which I’m presenting to you today is very straightforward and it consists only of the following considerations:

  • number of portfolio positions
  • differentiation in tiers to express my conviction
  • thresholds per sector
  • exposure to currencies

Number of portfolio positions

Personally I’m not too bothered by the amount of stocks I own from a diversification point of view. But I do find it important to keep it manageable from a time and effort perspective.

This is why I have chosen to limit my portfolio to a maximum of 40 positions.

And the great thing is that this also addresses my fail-save mechanism. I simply wouldn’t feel comfortable losing 10% of my dividend income because a single company is cutting its dividend (single stock risk). And I know this from my own experience, because this is exactly what happened to me when Royal Dutch Shell cut its dividend last year.

I can however carry a single dividend cut which would cost me between 0.1% and 5% of my annual dividend income. In such a case I would know that I can count on the other stocks in the portfolio to carry the loss. This holds especially true if the others keep increasing their dividends with an average of 5% annually.

#DidYouKnow
There are actually several academic theories that proof that you don’t need to own more than 10 stocks in your portfolio from a risk and reward point of view. Ray Dalio explains this very nicely in a video.

Differentiation in tiers

Some of those 40 stocks will be slow-growers and others will be fast-growers. Some will have a very large moat and others might have no moat at all. I think you get the point.

In the end I need a core of high quality dividend growth stocks as the anchor of my dividend portfolio allocation strategy. But from the other side I would like to allow some space for some specific stocks as well.

This is the reason why I have categorized my stock in 4 tiers

  • Tier-1: 10 core anchor stocks covering each 4% of my dividend income
  • Tier-2: 10 core stocks covering each 3% of my dividend income
  • Tier-3: 10 supporting stocks covering each 2% of my dividend income
  • Tier 4: 10 special stocks covering each 1% of my dividend income

Looking at those tiers, you can see that tier 1 stocks are the foundation of my portfolio. This means that they should be of the highest quality possible, because they are going to pay the majority of the dividends in my retirement.

A tier is not something fixed though. I am regularly re-evaluating the stocks in my portfolio to ensure that I have the right stocks in the right tier.

No matter how much time I spend on analyzing a stock, in the end every great business can go bad. Even the king of all dividend stocks, Johnson & Johnson, will go bad one day. From that point of view the stock market is not that much different than mother nature. Companies come and companies go.

Industry diversification – threshold per sector

Building a dividend portfolio also requires me to think about my sector allocation. What sector do I truly believe in and should form the core of my strategy? Which sectors support secular growth trends and which are facing very difficult times?

As an example, it is very clear to me that Health Care and Information Technology will be the sectors to be overweight in during the upcoming decade. On the other hand I’m not too sure whether the same applies to the materials sector.

Hence, I have decided to allocate the following percentages to sectors as threshold for the positions in my dividend growth portfolio:

SectorTarget Allocation
Consumer Staples23%
Healthcare21%
Information Technology12%
Financials12%
REITs8%
Industrials7%
Materials6%
Energy5%
Consumer Discretionary4%
Utilities2%
Telecom0%

As a rule of thumb, I’m having an approach of having maximum 2 stocks of a given industry in a single Tier.

As you can see, this overview also shows why I call myself a conservative investor

The Consumer Staples sector is known for being defensive and it typically provides downwards protection during a recession. This makes sense, especially if you believe in Maslow’s theory. People naturally choose food over jewelry during tough times. 

Another example is my conviction about the Healthcare Industry. I know that some investors are a bit anxious about the influence of politics and what Medicare for All could do to the healthcare industry. But if you look at Big Pharma and Biotech then I truly believe that we are at the brink of a very bullish and disruptive era.

I think that further breakthroughs in for instance computing power (i.e. quantum computing) will become a boon to the biotech industry. I really wouldn’t be surprised if 95% of cancers become curable during the remainder of my life-time.

At the same time those big pharma companies are very well protected by their patents. A well managed pipeline of drugs and targeted acquisitions will provide many of us with strong dividend growth for years to come.

Last but not least, the global population is still growing and we will suffer more and more from complicated diseases as time progresses. Therefore, in the long run I truly believe in the blue-chip companies in this industry. 

Other sectors in this table have similar stories, but as you can see, I’m not such a fan of:

  • Materials (too few companies that I know of)
  • Utilities (not in my area of interest).
  • Financials (I don’t like banks, but I do like insurance companies!)

Exposure to currencies

As the title of this blog suggest, I’m a dividend growth investor based in Europe. Therefore I’m also in a need to have a healthy exposure to companies from the Euro zone.

I noticed this after 3 years of investing in dividend growth stocks, because more than 80% of my portfolio was based on US Dollars.

This is something which I didn’t feel comfortable with. There’s just so much going on in politics, i.e. currency wars, trade wars, protectionism. Hence, I didn’t want to be over reliant on a single foreign currency.

At the same time European companies are often easier to understand for me. I tend to recognize their products and services quicker and they are also often passing by in the news.

The only down-side is the lack of dividend growth culture as part of the dividend policies from European companies. This means that it takes me more effort to find those European companies although I have expanded my knowledge quite a bit over the last 2 years.

Having said that, the allocation of European dividend growing stocks that I aspire in my portfolio is a minimum of 30%.

My desired dividend portfolio allocation

Let’s have a look then at how I’ve designed my portfolio allocation strategy!

I didn’t have the chance yet to invest in all of these stocks, because some companies like Nike were so far not attractively priced. I’m just crossing my fingers for another proper dip 🀞. 

Allocation %TierTickerCompanyIndustry
4%1JNJJohnson & JohnsonHealthcare
4%1SWX:ROGRoche Holding AG GenussscheineHealthcare
4%1AMS:UNAUnilever NVConsumer Staples
4%1PEPPepsiCo IncConsumer Staples
4%1MSFTMicrosoft CorporationInformation Technology
4%1APPLApple IncInformation Technology
4%1ETR:MUV2Muenchener Rueckvrschrng Gslchft AG MnchFinancials
4%1MMM3MIndustrials
4%1AMS:ADKoninklijke Ahold Delhaize NVConsumer Staples
4%1<><>Consumer Staples
3%2EPA:BNDanone SAConsumer Staples
3%2SWX:NOVNNovartis AGHealthcare
3%2NYSE:MDTMedtronic PLCHealthcare
3%2EPA:ORL'OrΓ©al SAConsumer Staples
3%2CBChubb LmtdFinancials
3%2NKENike IncConsumer Discretionary
3%2ETR:SIESiemens AGIndustrials
3%2AMS:DSMKoninklijke DSM N.V.Materials
3%2ORealty Income CorpREITs
3%2AMS:WKLWolters KluwerInformation Technology
2%3CPH:NOVO-BNovo Nordisk A/SHealthcare
2%3ETR:BAYNBayer AGHealthcare
2%3ABBVAbbvie IncHealthcare
2%3ETR:BASBASF SEMaterials
2%3OHIOmega Healthcare Investors IncREITs
2%3AMS:RDSARoyal Dutch Shell PlcEnergy
2%3XOMExxon Mobil CorporationEnergy
2%3AFLAflacFinancials
2%3ETR:ALVAllianz SEFinancials
2%3<><>REITs
1%4SBUXStarbucks CorporationConsumer Discretionary
1%4BMYBristol Myers SquibBHealthcare
1%4HSYHershey CoConsumer Staples
1%4ETR:SAPSAP SEInformation Technology
1%4LON:CSNChesnara PlcFinancials
1%4BME:ENGEnagas SAUtilities
1%4BBLBHP Group PLCMaterials
1%4DLRDigital Realty TrustREITs
1%4CVXChevron CorporationEnergy
1%4BME:REERed Electrica Corporacion SAUtilities

Final thoughts

As mentioned before, the 40 stocks listed above are not something fixed. I review and reassess my portfolio on a regular basis, so feel free to recommend new stocks to me.

So far, this allocation strategy has been working for me. It is easier to monitor and follow a pre-defined set of stocks and it helps me to eliminate the noise. At the same time it allows me to study the stocks at my own pace so that I am prepared to double down once a stock trades at a very attractive price.

This is how I was able to accumulate a full position in ABBV in 2017 very rapidly when there was quite some negativity around the stock. Hence, doing your homework is already half of the job!


This concludes my approach to my dividend portfolio allocation strategy.

I’m very interested to hear from you now. What do you think about my allocation strategy? Is there something which you would do differently? Do you share an overlap with my aspired portfolio? Any stock ideas? 

I hope this was helpful and that it will help you in designing your own dividend growth portfolio.

Just let me know and feel free to leave your question / feedback in the comment section.

Yours Truly,

European Dividend Growth Investor


Change Log – Dividend portfolio allocation strategy

  • 1 January 2020: Initial creation of this page
  • 8 May 2020: Updates, read more.

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Libor
Libor
1 year ago

Hi, I just wanted to let you know, Intel is 2x times in the table

European DGI
Admin
Reply to  Libor
1 year ago

Thank you Libor, good catch! I wasn’t aware of the duplicate entry and I will replace one of them anytime soon with a stock from the Noble 30βš”

Libor
Libor
Reply to  European DGI
1 year ago

ok, what about telecommuncation services sector? you ruled it out for some reason?

European DGI
Admin
Reply to  Libor
1 year ago

Hi Libor, Nope, i didn’t rule it out, it is just one of those sectors like materials or utilities. If any, i’d keep it small. I have been considering some AT&T in the past, but never pulled the trigger. I like their dividend, but not their debt load and their future prospects. It’s arbitrary, I know.

Let’s say it differently: it never excited me enough to get it on this list πŸ˜‰

Libor
Libor
Reply to  European DGI
1 year ago

Thanks, understood. In your list, all the stocks in the consumer discretionary sector are listed in US, have you considered some EU stocks from the sector?

European DGI
Admin
Reply to  Libor
1 year ago

Hi Libor, not really yet, but I am open to ideas! Remember I still need to carve out some time to review this list after I created the Nobles 30 list to see if I can strengthen my target portfolio πŸ’ͺ

Thrifty Hustler
1 year ago

Hi,

Thank you for sharing. I’m a newbie in FI and I’m planning to do dividend investing as well in the coming months/years, thank you for sharing your strategy.

European DGI
Admin
Reply to  Thrifty Hustler
1 year ago

Off course Thrifty! Just let me know if there’s any question that you might have.

Andy
Andy
1 year ago

Interesting article, thank you. Can you share what classification you have for your tiers 1-4? Also what your typical holding period for each is? Thanks

European DGI
Admin
Reply to  Andy
1 year ago

Hi Andy, I don’t fully get the first part of your question. Tier 1 is an allocation of 4%, Tier 2 3%, Tier 3 2% and Tier 4 1%. You can consider Tier 1 my foundation stocks in my portfolio. Companies that I put most of my faith in, because together they will make up 40% of my portfolio. Regarding your second question. I tend to buy and hold forever. I am aiming to never sell, unless a certain event happens which makes me change my thoughts (i.e. dividend cut, industry being disrupted, fraud) I hope this clarifies and thanks… Read more »

Allinvestor
Allinvestor
11 months ago

Great to see a fellow dividend growth investor from Europe putting some extra attention on dividend growers on the continent. Like you I have been drawn to DGI by American bloggers and have started to build a portfolio with well-known US names. However, I always felt like I missed coverage of European stocks as well and would like to include them more in my portfolio to diversify the currency and geographic exposure somewhat. Current European stocks are limited to Unilever, Shell and Fresenius SE. Seriously considering to add Henkel in the near future. Any thoughts on that company and the… Read more »

European DGI
Admin
Reply to  Allinvestor
11 months ago

Hi Allinvestor, thanks for stopping by!

Regarding Henkel: i think it’s an interesting company but not a SWAN (Sleep Well At Night). Hence in this case I still need to do some more research about them.

Ayeah, DSM is really in the top 3 of most desired stocks. They made an excellent turnaround into nutrition, just brilliant. Unfortunately I find the stock a bit pricy at this moment in time, so I rather wait for a strong pull back.

Some great names that you’re calling out there!

Life With Dividends
3 months ago

Hey eDGI,

This is a fantastic post. My allocation strategy is similar to yours in some respects: I have also divided my portfolio into categories/tiers. I call them something else and the criteria is slightly different to yours, but the general idea is similar.

Just noticed a slight typo in the ticker symbol for Apple, this should be AAPL instead of APPL.

Cheers!
LWD

MyFinancialShape
30 days ago

Hi European DGI Very nice portfolio! You allocation makes a lot of sense. I have a strong exposure to consumer staples and healthcare as well (in particular through Roche and Novartis which grew nicely over the last decade). It’s interesting to see that you have no exposure to Telecoms. I have to say here that many European Telecoms have disappointed, I have minor positions in Telefonica and Orange, and the performance has been daunting. So, that’s a sector I will avoid in future, such as bank stocks. On the other side, I made an investment in Deutsche Telekom more than… Read more »