My portfolio allocation strategy

Building a dividend portfolio doesn’t need to be complex. All you need is good diversification, consistent investment and patience. Compounding will do the heavy lifting for you ๐Ÿ’ช. In this article I will explain you my allocation strategy as an inspiration to you.

I thought it’s worth sharing my stock portfolio allocation strategy. It’s something that I’ve constructed a while ago and I’m still fine-tuning it from time to time.

Before I’ll dive into the details, I’d like mention that I’m conservative by nature and therefore my recommendation is to first build an emergency fund for a rainy day and pay-off all your high interest debt first to avoid getting in trouble when you’d purely need to depend on your stock portfolio. You never know what’ll happen, you might lose your job, be faced with a high medical bill or any other unpleasant financially impacting surprise.

Also, there exist many strategies regarding portfolio allocation, i.e. Bond/Stock ratio depending on age (100 minus your age to derive the percentage that should be allocated to stock in your portfolio). I believe that those are very valid strategies and who am I to challenge those? I’m not an economist who’s gained a PHD on this topic. I would advise you therefore to do a little bit of research on this yourself first.

Ufff, I’d had to get that off my chest and now I feel good again ๐Ÿ˜‰

When it comes to myself, I’ve established already a pretty decent situation with having built up enough cushion so that I’m willing to invest almost all of my new cash in stocks. Therefore this article is also focused on the stock part of my portfolio.

Allocation Strategy

I personally believe that my allocation strategy is very straightforward, definitely not academic and it consists only of the following considerations: number of portfolio positions, categorizing them in tiers, diversifying per industry and looking at the region of origin.

Number of positions

I’m not bothered really by the amount of stocks rather than that I want to be in a position to be able to monitor them without spending dozens of hours per day. That’s why I aim to limit my portfolio to a maximum of 40 positions. There are theories that you wouldn’t need more than 10 stocks in your portfolio from a risk point of view, but I wouldn’t feel comfortable losing 10% of my dividend income because a single company cuts their dividend. I can mentally carry a single dividend cut which would cost me between 0.1% and 5% of my dividend income knowing that other companies with their yearly increases would cover that gap. An example was GE’s dividend cut which didn’t stop me from growing my yearly dividend income.

Not every stock is the same…

Some are slow growers, other high-growers, some have a very large moat, others a small moat ad so on. Hence why I’ve categorized my stock in 4 categories which I’ll call tiers

  • Tier 1: 10 stocks with a total sum that equals 40% of my portfolio value and dividend income
  • Tier 2: 10 stocks with a total sum that equals 30% of my portfolio value and dividend income
  • Tier 3: 10 stocks with a total sum that equals 20% of my portfolio value and dividend income
  • Tier 4: 10 stocks with a total sum that equals 10% of my portfolio value and dividend income

Looking at those tiers, you can argue that tier 1 are my stocks that form the foundation and those are naturally the ones that I’ll focus most of my attention to. If a stock gets categorized in one of those tiers, then it doesn’t mean that they can never change to one of the other tiers. I’m often re-evaluating those categories, because from time to time something happens to the fundamentals and the future prospects of a stock (whether it’s positive or negative) and that might influence my thinking about the given stock and whether it’s categorized in the right Tier. 

For me the nice thing about classifying it like this is that its makes me call out what are my foundation stocks, but at the same time it allows me to keep an eye on stocks that have the potential to become a cornerstone in my portfolio (i.e. Tier 3 and Tier 4).

Industry diversification

Diversification is also important from me to mitigate the impact of a certain sector being in trouble (i.e. banks during the financial crisis), hence why i’m also tracking how much % of my portfolio I’d like to see in a given sector. At the same time it allows me to “discriminate” between industries, because when looking at the future and the world then I’m having a natural preference to be overweight in certain industries and underweight in others. For me the % allocation per industry looks like the following:

SectorTarget Allocation
Healthcare20%
Consumer Staples20%
Information Technology15%
Consumer Discretionary9%
Industrials8%
Financials7%
Energy6%
Materials6%
REITs5%
Utilities4%
Telecom0%

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

Looking at the above table is a result of me being a conservative investor. Consumer Staples are known for being defensive and downwards protection during a recession. This makes sense, especially as per Maslow’s theory. People naturally just choose food over jewelry during tough times. 

Also the Healthcare Industry is an industry that I’m a huge believer in. I know that many investors might be a bit anxious with the upcoming US election and what Medicare for All could do to the healthcare industry and definitely there’s something seriously wrong with drug pricing in general and especially within the US. But I’d like to look at the healthcare sector as a very interesting industry, just think about the impact that biotech had in the last 2 decades? Some cancers are simply just curable nowadays which wasn’t the case when our grandparents lived. And we’ll need more and more healthcare as to date the global population is still growing and we’ll suffer more and more from complicated diseases as time progresses. Therefore, in the long run I truly believe in the blue-chips in this industry. 

The other industries have similar stories, but as you can see, i’m not a strong believer in REIT’s (I simply don’t understand enough of it), Materials (too few companies that I know of) and Utilities (not in my area of interest). I do own some financials, but these are insurance companies and not banks.

Europe vs America and other regions

As the title of this blog suggest, I’m a dividend growth investor based in Europe. Therefore I’m also looking into building up positions from stocks listed in Europe. Those companies are typically easier to understand for me, because I often recognize their products and services quicker. They are also easier to follow in the news as they’re often mentioned there. At the same time it limits currency risks although that’s rather an interesting side-effect. Having said that, there’s not such focus from management of European companies on shareholder return like US companies, so it does take more effort to find those European companies simply because it makes the pond that we fish in smaller. 

Therefore, the allocation % of European dividend growing stocks that I aspire is minimum 30% of my portfolio.

My future Portfolio Allocation aspiration

Let’s have a look then at how I’ve designed my portfolio allocation strategy! I didn’t invest yet in every stock listed here, more about that another time, because some stocks have not yet met my fair value criteria.

Honestly, I’m just crossing my fingers for a mild recession coming up as stocks that are listed here at this moment in time (Jan 2020) are quite expensive and often times provide a relatively low dividend yield. 

Allocation %TierTickerCompanyIndustry
4%1JNJJohnson & JohnsonHealthcare
4%1SWX:ROGRoche Holding AG GenussscheineHealthcare
4%1AMS:UNAUnilever NVConsumer Staples
4%1EPA:BNDanone SAConsumer Staples
4%1PEPPepsiCo IncConsumer Staples
4%1MSFTMicrosoft CorporationInformation Technology
4%1APPLApple IncInformation Technology
4%1ETR:MUV2Muenchener Rueckvrschrng Gslchft AG MnchFinancials
4%1SBUXStarbucks CorporationConsumer Discretionary
4%1MMM3MIndustrials
3%2SWX:NOVNNovartis AGHealthcare
3%2NYSE:MDTMedtronic PLCHealthcare
3%2AMS:ADKoninklijke Ahold Delhaize NVConsumer Staples
3%2PGProcter & Gamble CoConsumer Staples
3%2INTCIntel CorporationInformation Technology
3%2CBChubb LmtdFinancials
3%2NKENike IncConsumer Discretionary
3%2ETR:SIESiemens AGIndustrials
3%2AMS:DSMKoninklijke DSM N.V.Materials
3%2ORealty Income CorpREITs
2%3CPH:NOVO-BNovo Nordisk A/SHealthcare
2%3ETR:BAYNBayer AGHealthcare
2%3ABBVAbbvie IncHealthcare
2%3AMS:WKLWolters KluwerInformation Technology
2%3LON:DGEDiageo plcConsumer Discretionary
2%3ETR:BASBASF SEMaterials
2%3OHIOmega Healthcare Investors IncREITs
2%3AMS:RDSARoyal Dutch Shell PlcEnergy
2%3XOMExxon Mobil CorporationEnergy
2%3BME:ENGEnagas SAUtilities
1%4LON:BATSBRITISH AMERICAN TOBACCO PLC ADS Common StockConsumer Staples
1%4HSYHershey CoConsumer Staples
1%4ETR:SAPSAP SEInformation Technology
1%4CSCOCisco Systems, Inc.Information Technology
1%4UPSUnited Parcel Service, Inc.Industrials
1%4BBLBHP Group PLCMaterials
1%4EPA:FPTotal SAEnergy
1%4CVXChevron CorporationEnergy
1%4BME:REERed Electrica Corporacion SAUtilities
1%4TAT&TCommunications

Final thoughts

I review and reassess my portfolio once in a while, so feel free to recommend a stock to me. I generally prefer European stock ideas.

This allocation strategy has been working for me so far. Monitoring these stocks on my watchlist also results in them popping-up from time to time when something happened that led to a certain investor sentiment and a related sell-off. Hence why in 2018 I was able to accumulate quite some ABBV and more recently to start a position in MMM.

I’m actually very interested to hear from you now. What do you think about my allocation strategy? Are there certain recommendations that you would give me? Do you share an overlap with my aspired portfolio? Any stock ideas? 

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


Change Log

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

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Libor
Libor
4 months ago

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

European DGI
Admin
Reply to  Libor
4 months 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 30โš”

Libor
Libor
Reply to  European DGI
4 months ago

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

European DGI
Admin
Reply to  Libor
4 months 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 ๐Ÿ˜‰

Libor
Libor
Reply to  European DGI
4 months 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
4 months 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 ๐Ÿ’ช

Thrifty Hustler
4 months 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
20 days ago

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

Andy
Andy
2 months 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
20 days 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 »