How to Measure and Manage Your Dividend Portfolio

Peter Drucker, one of the most notable management consultants and business visionaries of all-time, once wrote: “What gets measured gets managed.”

Mr. Drucker is getting at several points. Perhaps most obviously, we are more likely to pay closer attention to something if we simply begin observing and examining it.

By developing measurements of an activity, we can begin to better understand the activity itself and figure out ways to tangibly improve it.

Now, should we begin measuring every last activity in our lives? Of course not. Measuring and trying to better manage many of the activities we carry out each day would become counterproductive.

The 80/20 rule seems to apply here where measuring 20% of our activities likely deliver 80% of the “management” benefits available to us. The key is to focus on the most impactful activities that are perhaps being under-measured and inefficiently managed today.

One such activity that most of us participate in is the management of our dividend portfolios. Many of us have the majority of our nest eggs invested in dividend-paying stocks. And some of us are attempting to almost exclusively live off dividends in retirement.

Simply put, our dividend stock investments fund our livelihood, and having several measuring tools can help us make better informed portfolio management decisions to reach our goals.

Despite the bountiful data provided by brokers and countless other information services, managing a sprawling dividend portfolio is not always easy. Most portfolios hold at least 20 stocks, and some have approached or even exceeded 100 different holdings.

Not surprisingly, many frustrations and questions begin to rise:

  • How much income is my portfolio going to generate this month? What about the full year?
  • How safe is my overall income stream, and how quickly is it growing?
  • Am I taking on too much risk with my portfolio? Am I diversified enough? How do I know?
  • I am not sure which stocks I am depending on the most for my annual dividend income
  • I can’t believe one of my holdings cut its dividend – could I have seen this coming?

Assembling the information needed to answer these questions is hard enough, much less maintaining it.

However, there had to be a better way than trying to use Excel spreadsheets or “flying blind” with our decision-making.

We set out to solve these problems for ourselves and created a Portfolio tool that is free to try.

The Portfolio tool's reports make it really easy to track your portfolio’s monthly dividend payment schedule, Dividend Safety Scores, sector diversification, largest income contributors, riskiest dividend stocks, and other key indicators needed to make better informed decisions and avoid unnecessary risks.

Let’s take a look at how the Portfolio tool helps us stay on top of several important issues and better manage our dividend portfolios.

How Much Income is my Portfolio Generating?

After doing the hard work of building a dividend portfolio, we want to know what sort of income stream we can expect from our efforts.

Knowing how much our portfolio is projected to pay us helps with budgeting and provides a very precise measurement of where we are compared to our goals.

The Portfolio tool looks at the indicated dividend rates of all of our holdings and projects our total annual dividend income for the next year and our scheduled dividend payments for each of the next 12 months. 

As seen below, the tool tells us that our portfolio’s projected annual dividend income is $4,836. Even better, we can see how much of that annual income is paid to us each and every month, as well as upcoming payments that are about to hit our account.
We can audit any single month to see exactly which companies are paying us and how much income we will be receiving. There is no more guessing or fussing around with out-of-date spreadsheets.
Current income is great, but dividend investors also understand the importance of dividend growth. The Portfolio tool reveals the annual dividend income your portfolio would have generated since 2006 and calculates its annual dividend growth rate.

As seen below, our portfolio’s dividend income would have grown by 5.8% per year over the last decade and remained stable during the financial crisis. While history usually doesn’t repeat itself, understanding our portfolio’s historical income growth can keep us more realistic about its dividend growth potential.
To understand the impact of dividend growth on our annual income, the Portfolio tool shows us a table that projects our annual dividend income over the next 5, 10, 15, and 20 years at annual growth rates ranging from 1% to 15% per year.

By reviewing the table, we can get a sense of where our income could be in the future and compare that to our goals. Investors might realize that they need to be saving more money or finding stocks with faster dividend growth rates. However, it is better to find out sooner rather than later.

How Safe is My Portfolio’s Income Stream?

Dividend cuts are never pleasant, and no one wants a shrinking income stream.

It is not always easy to know which of your dividend stocks is at risk of slashing its dividend. We created Dividend Safety Scores to help investors quickly identify which, if any, of their holdings could be at the highest risk of a dividend cut in the future. 

The Portfolio tool will show you your portfolio's overall Dividend Safety Score mix, as well as which holdings score the lowest for Dividend Safety and may need to be reviewed.

Knowing this information helps weed out riskier sources of income to avoid unpleasant surprises and refocus your portfolio on quality dividend stocks that are aligned with your investment objectives. 

Am I Diversified Enough?

Diversification is a touchy subject because it ultimately depends on one’s risk tolerance. Generally speaking, we think it seems reasonable for most investors to own between 20 and 60 stocks.

However, the benefits of diversification only occur when we own different types of businesses. For example, a portfolio consisting of 30 oil producers is not diversified – all of the stocks will move together based on the price of oil.

The Portfolio tool will size up the diversification of your portfolio by sector mix and by dividend income mix.

As seen below, our largest sector is Consumer Staples at 18% of our portfolio’s total value. While there is no right or wrong answer, we prefer to invest no more than 25% of our portfolio in any one sector because you never know which sectors could be hit by unfavorable developments.
The tool also shows us a pie chart of our dividend income by stock. We can see that Cisco Systems (CSCO) and Philip Morris International (PM) are the biggest sources of our income at 4.8% and 4.7%, respectively, of our portfolio’s total income.

Generally speaking, we prefer that no single stock accounts for more than 5% of our total income for diversification purposes. We can quickly see that our blend of income is nicely diversified – we are not overly dependent on any one stock for our dividends.

Closing Thoughts

Investing involves a lot of randomness and unexpected events. However, there are a number of measurements we can take to get a much better handle on our dividend portfolios.

By remaining aware of our portfolio’s Dividend Safety Scores, diversification, income generation, dividend growth, and potentially risky holdings, we can sidestep most avoidable risks and be much better equipped to make smarter portfolio management decisions.

Simply put, the Portfolio tool helps investors measure and manage their dividend portfolios to ensure they remain headed in the right direction of their goals.

You can learn more about how to get started with our Portfolio tool here.

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