Building a Dividend Portfolio: How Many Stocks Are Enough?

by: Intelligent Speculator

How many dividend stocks should you own in your passive income portfolio?

It’s a common question and there is no way to answer it perfectly. Why? Because you could probably bring 10 different “experts” and they would all come up with different answers. There is no perfect answer, but it’s a question that I get so often that I thought it’d be interesting to at least give my point of view. Let’s start with the basics.

Why you would want the number of stocks to be as small as possible?

  • Having fewer stocks also means less trading fees.
  • The more companies you have in your portfolio, the more difficult it becomes to track them

Why you would want it to be as big as possible?

  • To smooth the passive income (adding companies makes dividend changes for one company less visible).
  • To not depend on a specific sector or company too much (imagine having only a few financial companies during the most recent credit crunch).

So how do you decide?

So what does it become? It’s basically a balancing act where each person would have a different “middle point”.

The number of stocks would generally depend on:

  • Your ability to tolerate volatility.
  • The size of your passive income portfolio (for example, I have written about starting a dividend portfolio with $5000… do not spread such an amount over 10-15 stocks).
  • The amount of time you want to spend researching these stocks.
  • The turnover you wish to have (are you a buy & hold or do you rotate often?).

How do I proceed?

It’s not necessarily set in stone, but here are my basic guidelines depending on the size of the portfolio:

Portfolio Size #Dividend stocks
0-5000$ 1-2
5000-10,000$ 3-4
10,000-20,000$ 5-10
20,000-30,000$ 10-15
30,000-50,000$ 15-17
50,000-100,000$ 20
100000$+ 20-30

As you can see, the number of stocks, at least for me, does not vary that much. Once I reach a passive income of $100,000 or so, I would generally keep the same number of stocks. Why? Because tracking and finding 25 winning dividend stocks is more than enough for me.

It does give me comfort knowing that a 10% drop in any one of these stocks results in about a 0.4% loss for my portfolio which is very sustainable. I would from time to time change these 25 stocks obviously but trying to do too much reallocation can end up costing too much both in terms of trading costs but also the return. Why? Because chasing returns has always been shown as a losing strategy. You go with stocks that you believe in and that have strong fundamentals, not the stocks that have done the best in the past 12-24 months because those are very likely to not be the best performers in the next 12-24 months.