The Prudent Investor

Letting Dividends Do Their Work

Recent Articles

Are Dividend Reinvestment Programs Dead?
Dividend Reinvestment Programs have been a staple for acquiring shares for years.  An alternative that supersedes this option is holding shares through a broker that offers the same advantages.  It is instructive to evaluate this option to determine if this DRiP still has a place for the dividend investor.
Canadians and Fee-Free Dividend Reinvestment Programs
Canadians have a different set of issues to deal with than Americans. Numerous advantages we have in the U.S. are just not available in Canada. In this article, a Canadian offers his methodology, in the hopes that it may be a starting point for others.
What Is A Dividend Champion?
Oddly enough, the simple definition of a Dividend Champion being a company that has increased their annual dividend each of the past 25 years can be interpreted numerous ways. Should we care?

How Many Stocks Should You Own?

by George L Smyth

A reader asked me a question that boiled down to them wanting to know how many stocks should be in their portfolio.  It is a question with an answer that will be different for each person, but knowing how to arrive at that answer is simple.

Many people own more companies than I do.  This is a personal choice, so if that number works for them, then it is the correct number.  As a serious photographer who works with historic processes, I have always said that whatever means one chooses to share their vision, if it is successful for them to do so, then that is the correct choice.  As noted in a previous article, I feel that this is the same with investing.

Figuring This Out

Initially, my approach to selecting companies was haphazard.  Upon seeing a company that I thought would do well in the short run, I would buy it – simple as that.  It led to numerous trades, which worked well, until it did not work well.  In the late 1990s, most of us were geniuses, and in the early 2000s, most of us were idiots.  (The uninitiated can look at the DOW’s price change during those periods.)

Reexamining my investment philosophy, I decided to examine what had worked for me and what had not.  One of the many lessons learned from the early 2000s was that I had owned too many companies.  To remedy this, I took an example from one of my hobbies – numismatics.

I started collecting coins when I was around 7 or 8 years old.  Pennies were the only thing I could afford to collect (even in the late 1950s, 25 cents a week allowance was not much).  As time went on, I could afford to invest more into my hobby and expanded to other denominations, and eventually ended up all over the place.  I finally decided that it was time to specialize.

Specialization led me to 18th-century British tokens, with which I had grown a fond interest, as each token had a real story.  Even this was too wide, so I narrowed things down to collect only tokens in R. C. Bell’s book, Commercial Coins.  I now have a focused collection of interesting tokens over two hundred years old.  Yes, I still have most of my other coins, but I am most proud of the token collection.

Back to Investing

Through the years that led up through the early 2000s, it was dividend companies and my participation in DRiPs that had been steadfast.  I had “collected” dividend companies that looked good, and in turn, good things had happened.

The issue was that I had so many companies that I felt like I was in a boat without a paddle.  I was going in the right direction but would not be able to maneuver if an obstacle got in the way.

As in chess (another hobby of mine), it was time to figure out how I wanted the board to look, then work to make it so.  I decided to trim the number of companies I owned to the point where I could track them.

Finally, the Answer

How many dividend companies should one own?  One should own only as many companies as they can track.  Owning companies that are not within the understanding and/or view of the owner moves toward speculation – one simply hopes that things will work out in the end.

What do I mean by "track?"  You track a company by knowing what the company is doing, and you know what a company is doing, in the least, by scanning the quarterly and annual reports.  These reports can be scanned because you are looking for specific things explained within.

It goes back to a suggestion I made long ago that one should write down (or type into a document) the reasons for buying a company before making the purchase.  By physically committing the decision to paper or an electronic document, the reasoning is real, and ensures that there is more to the decision than, "I think it will make me money."

The information within the quarterly and annual reports should support those reasons.  If they are not supported, then the company should be flagged for further study.  Was my initial assessment incorrect?  Do I understand the reason for the change?  Is this a temporary setback, or is it a change in the company's direction?

An extreme example was my purchase of Enron.  When I started buying shares, the company was the largest supplier of natural gas in North America, which was the reason I selected it.  They had solid earnings (until they didn't and lied about it) and fulfilled my reason for purchase.  We all know what happened later.

The red flag came when the company changed its focus to something completely outside of its core competency.  I hung on for a short while, hoping that this would work itself out, but soon realized that something was seriously wrong and sold my shares.  Of course, this is a mere thumbnail of what happened but is instructive.  One cannot buy and hope, one needs to buy and understand. 

A more concrete example for me is National Fuel Gas.  I have made several purchases because I see the company’s ability to grow.  For instance, they intend to expand their interstate pipeline system through several projects currently underway.  It only takes a moment to check the progress of this in their 10-Q report.

I urge readers not to jump to the conclusion of selling if a milestone is not reached.  Especially now, with COVID still creating havoc, there are many legitimate reasons a company may not be able to deliver.  One needs to understand if the situation is a temporary setback or a permanent one, which could be the difference between holding and selling.

Also, though a company's direction may be changed, this should not necessarily be the death knell for holding the stock.  Changing circumstances require consideration, but if we are not keeping track of the company in the first place, then the point is moot.

In addition to what the company is doing, I like to keep track of the ex-div dates.  It does happen that occasionally I come across some extra cash.  The question then becomes how it will be invested, and I always want to select the best company available.  As often as not, however, several current holdings look good to me.

A company with an ex-div date on the horizon will often serve as a good tie-breaker.  It allows me to grab a small advantage when it comes to getting a return on my investment.  I used to keep a list of such dates in my spreadsheet, but that required manual entry, which was less than convenient.  Fortunately, Stock Rover has this information easily at hand.

Ex-div dates
Chart available via Stock Rover

Another reason for keeping track of the ex-div date is that when it is established, not only the date of the next dividend is known, but also the amount.  A company that cuts their dividend is a sell signal for me, so I want to know if/when it happens.

Finishing Up

I have mentioned photography, numismatics, and chess as hobbies in this article and could continue with music composition, reading, travel, writing stories for my granddaughter, and so on.  I have a host of things outside of investing where I want to spend my time, so for me, a dozen companies appears to be the sweet spot of having enough companies in which to invest, and not so many that it takes away from the other things I want to do.

This way, I can spend a couple of hours a week tracking the companies I own, writing articles for this blog, and considering new investments if the need arises, and still have time to spend on my many other interests.

I have friends who spend more time with their investments, so creating their own mutual fund works for them.  I own a couple of index funds for diversification, so I do not see this need for myself.  However, if this works for others, then it is the right decision for them.

So my advice is not to own more stocks than you can afford to follow, and that number can range between just a few to a hundred or more (yes, I know people who own that many).  There is no right or wrong number, as long as that number works well for you.

Other Articles of Interest

Stock Tips are Bunk

Understanding the DRiP

National Fuel Gas

Understanding the Dividend

A Dividend Spreadsheet for Google Sheets