Risk Analysis of Portfolio – 2009 3Q

growthLast week, I presented an update on the monthly progress of my dividend portfolio. In this post, I am discussing the quarterly risk analysis. My objective here to make sure I am continuing to following my risk management process.

  1. Maintain pre-determined asset class allocation;
  2. Maintain pre-determined diversification (any sector should not exceed 10%); and
  3. Dividends from a single stock should not exceed 5% of total dividends.

My dividend portfolio holdings can be referenced in My Portfolio menu at top of this page.

Maintaining Asset Allocation

Chart 1 shows the asset class allocation along with my maximum target limits. In general, I am continuing to meet (or much closer) to my pre-defined target levels. During 3Q09, I did not make any contribution to the emerging markets index funds such as VWO and EPI. This was because I believe they rose too quickly to my comfort level. I am still tad lower than my maximum limit for emerging markets.

Dividend Portfolio : 3Q09 Asset Allocation

Dividend Portfolio : 3Q09 Asset Allocation

Maintaining Diversification

For industry sectors, I have a pre-defined maximum limit of 10% for each sector. Chart 2 shows that I have higher exposure (relative to my limit) in financial derivates and consumer sector. Energy sector is almost equal to my max limit.

  • Financial derivatives is a sector including dividend CEFs and REITs and hence it has higher percentage. Since this includes two sub sectors, I am comfortable with this exposure.
  • The consumer sector allocation increased significantly because of my recent purchases. I took the opportunity of lower valuations and initiated position within the same quarter. This resulted in higher allocation. My future purchases will likely to be limited in this sector.

For morningstar style classification, I do not have any pre-defined allocation limits. Chart 2 also shows that my portfolio is concentrated around large cap stocks (more so on value and growth). Intuitively that seems to be correct because majority of the dividend-growth stocks are stable and mature companies. I add two mid cap dividend growth stocks in last few months. I will continue to look for small cap dividend growth stocks. Another option is to invests in a broad small cap index ETF.

Dividend Portfolio : 3Q09 Diversification

Dividend Portfolio : 3Q09 Diversification

Criteria of Maximum Dividend per Stock

My objective here is to make sure that dividends from any given company do not exceed 5% limit. This limit allows me to reduce the impact of dividend cuts on passive cash flow. The chart shows that O (~7%), AOD (~14%) exceeds my pre-defined limit. I will not be making any changes any of the individual positions. I do not expect to see dividend cut in O. My capital allocation to AOD is very low and even if the dividend is cut in half, my yield will still be more than 5% and dividend contribution be still above 5% of total dividends cash flow. However, I will not be making any future purchases. Therefore, my allocation will automatically come down.

Dividend Tree : 3Q09 Max Dividend Criteria

Dividend Tree : 3Q09 Max Dividend Criteria

The quarterly update shows what action I took during 3Q09.  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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