Disclaimer: Things I am not going into here - purchasing criteria or rebalancing schedule. Nor buying or selling criteria. Also it is assumed that this is basically a buy and hold strategy. Nor is any sector analysis offered. This article is simply a statement of my current view on how to balance an income oriented portfolio of stocks.
I and presumably many income oriented investors are faced with the choice of how to allocate their capital among their dividend paying stocks.
My initial choice for a target rule was equal weighting, regardless of any other factor. So if I had decided that a particular stock was worthy of purchase, I would endeavor to buy enough to keep the market values of all stocks the same. A simple minded and easy to follow rule, but as I started to use it, I became nervous that it did not adequately address risk. Higher yielding stocks tend to also be higher risk ones. How many "risky" stocks should I allow myself to pick? How many "safe" ones? This rule gives no guidance.
I have since considered a new idea, which is to try to keep the amount of dividend payout per quarter equally weighted, rather than the market value of the holding. One nice thing about this rule is that it naturally manages risk. It causes you to buy more of a lower yielding stock to bring the payout up to the line, and less of a higher "riskier" one. It also reduces reliance on the contribution of any one stock to the final income result. So if one of your companies has a dividend reduction or elimination, or you just want to sell it for some other reason, your portfolio results are no more reliant on it than on any other stock.
Having said that, I am not advocating this as an absolute rule. My dividend payouts have a couple of outliers on the high and low sides. But there is certainly something of a bell curve shape if I graph them.
This rule at least suggests that one should not load up on high yielders, nor stick solely to conservative stocks, but rather maintain the majority of your stocks at levels that keep their quarterly payouts at similar levels, while allowing for a small number of higher or lower paying stocks. So it is an improvement over my first rule in that it does offer guidance on when a portfolio is getting too risky or too safe overall.
Granted that this does not in any way take into account dividend growth projections directly. All I would say there is that one can attempt to project a portfolio into the future, using antipated reinvestment and DGR, and use that as a basis for over or under weighting a stock which otherwise would receive a different level of investment based on the stocks current state. Then again, one can also just take the lazy route and simply adjust weighting whenever the portfolio is rebalanced. As a stocks dividend grows, it may find itself moving out of the bell curve, triggering either it or another stock to be rebalanced.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.