Dividend Growth Investing: The Role Of Diversification

May 09, 2012 12:22 PM ETABT, CVX, JNJ, KO, MCD, PG210 Comments

Stock portfolio diversification is a contentious topic among investors. On the one hand, there are those who argue that a portfolio should be concentrated on a small, highly selective group of stocks (less than 10 stocks, perhaps as few as 4 or 5). These few stocks are considered to be the investor's best ideas and can be monitored closely and frequently. On the other hand, there are those who argue that a portfolio should include a fairly large number of stocks (about 20 or 30, perhaps 50 or more). These stocks may provide broad diversification across and within sectors while reducing the portfolio's volatility. I think each approach is justifiable and can lead to investing success, although it may depend on how one defines success. Regardless of the approach an investor chooses to follow, I think it is critical to evaluate the role of diversification in meeting the investor's goals.

What Is Your Investing Goal?

Every investor should have a goal and an investing strategy that is tailored to achieving that goal. As a dividend growth investor, my primary goal is to build a sustainable and rising stream of income from dividends. The plan is for this dividend income stream to eventually replace my job income and allow me to be financially secure in retirement. My secondary goal is to achieve a satisfactory total return on my investments, which I anticipate will happen naturally while I pursue my primary goal. To create my dividend income stream, I have been investing for the long term in established companies that have paid increasing dividends for many consecutive years, generally aiming to buy their stocks at attractive valuations. Some well-known examples of dividend growth stocks in my portfolio include Abbott Laboratories (ABT), Chevron (CVX), Coca-Cola (KO), Johnson & Johnson (

This article was written by

I am a 40-year-old investor and a professor at a university. I have been following a value-oriented dividend growth investing strategy since 2012. I have written occasional reviews on Seeking Alpha about my portfolio and investing progress.

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