Risk Analysis of My Dividend Portfolio


In the earlier post, I discussed that risk management should include asset allocation and quality of investments. I also mentioned criteria’s that I use for my dividend portfolio. The four criteria I use are:

  1. Maintain diversified asset allocation;
  2. Continuity of the stock to meet my buying objective;
  3. Companies’ ability to consistently grow dividends; and
  4. Dividends from a single stock should not exceed 5% of total dividends.

Today in this post I am using above criteria’s to analyze (and action taken) my dividend portfolio. My dividend portfolio holdings can be referenced in “My Holding” menu at top of this page.

Maintaining diversified asset allocation

I look at asset allocation in three different ways viz. (i) asset class; (ii) industry sectors; and (iii) morningstar style classification. For each type of analysis, I have a pre-defined target levels. At this point in time, these are just an arbitrary numbers which I believe is good for risk profile. I do not have any reasoning why those numbers.

  • For asset class, in general, I am continuing to meet (or much closer) to my pre-defined targets levels. Emerging market is one asset class for which I do not have any exposure. This is one area in which I need to do more work.
  • For industry sectors, I have a pre-defined maximum limit of 10% for each sector. The chart shows that I higher exposure (relative to my limit) in financial derivates (i.e CEFs), healthcare, and real estate. The health care exposure is limited to JNJ and PFE. At this point in time, both are good quality stocks. So I intend to continue holding it with no further capital allocation. Financial derivates is a sector, where I will reduce my exposure.
  • The chart for morningstar style classification shows that my dividend portfolio is concentrated around large cap value and growth stocks. Intuitively that seems to be correct because majority of the dividend-growth stocks are stable and mature companies. I may perhaps need to add mid cap stocks. I will be looking into this.

Continuity of the stock to meet my buying objective

Qualitatively, except AOD and IGD, all of the positions that I have in my dividend portfolio continue to meet my buying objective.

  • Based on this criterion; AOD (shifting concentration from international to US-Based), and IGD (return of capital) are two stocks which are in probation.

Companies’ ability to consistently grow dividends

All the stocks continue to meet this criterion except GE, IIA, IGD, and PID.

  • PID is an index ETF which continues to meet my buying objective. Therefore, I intend to continue to holding PID even though it is not growing the dividends.
  • Based on this criterion alone; GE (no increase), IIA (managed distribution, no increase), IGD (return of capital based distribution) are three stocks which are in probation.

Individual stock dividend less than 5% of total dividends

The chart shows that GE (~10%) and AOD (~20%) exceeds my pre-defined limit by significant amount. I will need to scale back my exposure to ensure that dividend cuts do not affect my passive cash flow.

Action taken:

My asset allocation showed that I had excessive exposure to financial derivates (IGD, IIA, AOD) and I had higher exposure to risk-to-dividend (ADO, GE). I made following changes:

  • I reduced my holding in GE by selling partial positions. My dividends from GE are now only 5.5%.
  • I have put IGD in the sell block. IGD is an example from my high yield chasing days when I was still learning different aspects of distributions such as income, qualified dividends, ROC, short gain, long gains etc. I do not believe it is a good quality investment because majority of the distribution consist of return of capital. Selling IGD will also help in reducing my exposure to fund based investments. I am evaluating when to sell.
  • I am continuing with IIA a real estate based income CEF. It continues to meet my buying objective and maintains stable dividend annually.
  • My concern with AOD is the CEF has transformed from 65%+ international allocation to 65%+ US-based allocation. I am no longer getting international exposure with AOD (which was my buying objective). However, my current capital allocation for AOD is 6.2% which I expect to reduce further with more stock purchases in this quarter. Additionally, my existing YOC is in excess of 20%. Assuming dividend reduction by 10 to 15%, even then my YOC will be well above 5% and it will reduce my single stock dividend to approx 10% or even less. With this background, I intend to continue holding AOD. I will be looking into changing my objective to hold this stock.

I hope with this approach to risk-based allocation, I will reduce my risk to dividend cash flow and continue to maintain potential for capital appreciation.

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