Once an investment is purchased, it has to be monitored frequently. While monitoring is important, it is also important to avoid too much action with your investments. The hardest part of dividend investing is sitting and doing nothing for years if not decades. The good businesses will usually take care of themselves, while the bad businesses may produce some dividend payments for you for a few quarters before cutting them or eliminating them completely.
The way I monitor investments is by focusing on annual reports and maybe quarterly reports and press releases. I usually update my stock analysis about once every 12 - 18 months as well. I do this mostly to aide me when deciding to buy a stock or not. I discuss the conditions that would cause me to sell in the next chapter. An investor should apply extreme caution to dealing with information that is noise, and does not really present you with material information about the business you own. Examples include analyst opinions on stocks, news articles from mainstream media sources or TV commentary from the likes of CNBC. You should apply your judgment in determining whether you would benefit by listening to this noise.
In the analysis, I look for rising earnings per share, dividend per share, sustainability of distributions and how the business is doing. If you have spent a lot of initial time learning about the company, there would not be much to learn from year to year. For a period of several years however, you might learn about new acquisitions, divestitures, and plans on how to grow the business. You should be careful if management focuses too much on growth at any price, as this could result in poor performance in the fundamentals that matter to you as a dividend investor. For example, if a utility company you own is trying to revolutionize the energy market by trading energy, electricity and internet bandwidth, without focusing its attention to actual profits, this could be a red flag. This is Enron of course, which was a sleepy company until management got crazy in the 1990s and eventually bankrupted shareholders and left thousands of employees without a job.
Investors might also monitor investment for extreme overvaluation. For example, a business that is ridiculously overvalued might be better off sold, although this could be evaluated in light of the steep tax liabilities it could produce. Sometimes it might make sense to hold on to a temporarily overvalued business, merely because the investor expects the improving fundamentals will "bail them out" eventually. For example, Coca-Cola (NYSE:KO) and Wal-Mart (NYSE:WMT) were terribly overvalued in 1999 - 2000. However, the improved fundamentals eventually bailed investors out. Of course, the capital invested in Coca-Cola and Wal-Mart didn't deliver much in terms of dividend income, and could have been invested somewhere else. However, if significant unrealized profits were generated, selling and buying something cheaper could have been an exercise in wealth destruction. This is because there are no guarantees that the undervalued security in an overheated market is not a value trap. Therefore, investor would have been better off simply holding off, and reinvesting dividends elsewhere.
One should also monitor positions that go above a certain pre-set threshold. For example, if you hold 40 individual securities in your portfolio, each position would account for 2.50% in an equally weighted portfolio at the start. Over time however, it would not be unreasonable to have a position or two, which turn out to be outstanding winners, and prove to be multi-baggers (they increase in price several times above your purchase price). If such a position now accounts for 10% of portfolio value and dividend income, it produces a larger strain on portfolio income for diversification purposes. If you are in the accumulation stage, you can simply add new funds and dividend payments received and apply them to other attractively priced securities. As a result, the overall weight of the multi-bagger would decrease. In the retirement phase, you can simply reallocate dividends towards other securities. The main idea is to try to let your winners run for as much as possible, and not tinker with your portfolio too much, unless there is extreme overvaluation, dividend cut or a fundamental shift in fundamentals. The only reason why I would always sell is included in the next chapter.
Disclosure: I am long KO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.