The Need For Dividend Diversification

by: Integrator

Some investors who hadn't thought of diversifying dividends may have been caught short by the events that took place in 2008-2009 where a number of companies drastically cut their dividends. A number of the dividend stalwarts that had previously increased dividends for many years such as Citigroup (NYSE:C), Bank of America (NYSE:BAC) and General Electric (NYSE:GE) were all forced to make major cuts to dividends. The interesting thing about the dividend cuts that took place during 2008-2009 was that they were primarily associated with companies in the financial services sector. I read a very interesting article on Seeking Alpha by Robert Schwartz which indicated that 71% of dividend champions actually maintained or increased their dividends during 2008. Many of those that cut their dividends were actually financial services companies.

If you were unable to pick the impacts of the implosion in mortgage lending would have on bank dividends, it's possible you may have been caught unaware when many of these high yielding dividend raising banks started to cut dividends which may have had major impacts on your dividend income.

Having a diversified dividend portfolio comprised of different stocks across a variety of sectors and countries can help insulate your portfolio from major left field events that either pummel an individual stocks dividend or impact an entire sector.

There are several ways that a dividend investor can achieve dividend diversification.

Diversify across industries

Investors who didn't have the majority of their investment tied up in financial stocks would have been spared the major impacts of the 2008-2009 dividend cuts. Having a dividend basket comprised of a broad base of companies across many different sectors would have helped preserve the continuity of dividend income and actually resulted in dividend increases in a number of cases.

While Bank of America and Citigroup had dividend cuts in the order of 80-90% in 2009, companies in the consumer products categories and healthcare actually continued to raise their dividends. The Coca Cola Company (NYSE:KO), Procter & Gamble (NYSE:PG) and Colgate Palmolive (NYSE:CL) posted healthy dividend increases through 2008-2009. In Coca-Cola's case, the dividend was increased almost 10%, Procter & Gamble also increased its dividend some 13% while Colgate Palmolive increased its dividend almost 10% as well.

Diversify Internationally

Making a conscious effort to diversify dividend holdings internationally can also help insulate you from country or market specific impacts. International economies are in different economic cycles with different rates of economic growth at any point in time. Economies across the Asia-Pacific region have been experiencing strong growth, in spite of the slow growth in Europe and the US. Investing in international dividend payers can smooth out downturns in the U.S. economy that depress dividend growth.

While the US banks made drastic cuts to dividends through 2008, banks in other regions were relatively less affected. In fact, banks such as ICICI bank (NYSE:IBN) in India actually increased their dividend. Given the likely increases in disposable income for much of the population in the coming years as well as millions of Indians entering the banking system, the prospects for continued dividend increases for ICICI bank look promising.

With a wave of transformational business models being created in markets overseas, there are a new wave of dividend payers who could be riding the same wave of earnings growth that technology leaders such as eBay (NASDAQ:EBAY) rode a decade earlier. Mercadolibre (NASDAQ:MELI) operates the largest e-commerce marketplace in Latin America. It offers many services similar to what eBay offers, including an online marketplace and payment settlement. Best of all, Mercadolibre also pays a dividend.

Small company dividend payers

While smaller dividend paying companies don't have the dividend paying history of some of their larger, more established competitors they may be growing in smaller fast growing niches which can be more resistant to economic impacts.

As some of the larger pharmaceutical players such as Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) experience the impacts of slowing revenues from expiring patents, there are a wave of companies experiencing growth from the digitization of medical health records. Quality Systems (NASDAQ:QSII) is one such company that is involved in the space. Quality Systems has revenue and cash flow growth of close to 23% per annum over the last 5 years. It also has a dividend yield of close to 3.6%. With electronic medical records being a federally mandated priority, players in this niche should be able to ride a wave of growth for at least the next few years.

While dividend investors can occasionally be faced with dividend reductions that are not anticipated, having a well diversified portfolio across industries and across geographies can help lessen the chances and impacts of unexpected dividend reductions in a specific company or industry.

Disclosure: I am long MELI, QSII. 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.

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