Exploring Dividend Stocks And Asset Allocation
The purpose of this article is to answer the question: what percentage of my portfolio should be in dividend stocks?
Unfortunately, there isn’t a “one size fits all” answer for every investor.
However, by making several decisions related to your risk tolerance, asset allocation, and investment strategy. You can easily come up with an answer to this question for your unique situation.
So, allow me to share how I like to think about the answer to today’s question…
What Percentage Of My Portfolio Should Be In Dividend Stocks?
The percentage of your portfolio that should be in dividend stocks could be as high as 100%. As little as zero. Or, anywhere in between.
To find your portfolio percentage to invest in dividend-paying shares…
First, determine your allocation to stocks.
Second, decide on your dividend stock investment strategy. I suggest, to keep things simple, there are 3 such strategies to consider are:
- Income
- Growth
- Growth and Income
Next, let’s unpack this answer by working through some definitions and examples.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Then after you are done, but before you go. Be sure to check out all of our…
Articles About Earning Dividends
Determine Your Allocation To Stocks
Here are some thoughts for determining your stock allocation…
The Rule Of 100 Minus Your Age
One way to determine your allocation to stocks is using an old “rule of thumb”.
It says to take your age and subtract it from 100. The result is the percentage you should allocate to stocks.
For example, a 35-year-old investor would allocate 65% (100-35) of his or her portfolio to stocks. Reducing that allocation as time passes. Thus reducing stock market risk as one gets older.
Here’s another way to think about your stock allocation. This time, it is based on academic research…
Academic Research And Asset Allocation
Studies have shown that an investment portfolio comprised of 60% stocks and 40% bonds offers the greatest potential return on investment. With the least amount of risk and volatility.
So, you could put the research on your side. And allocate 60% of your portfolio to stocks. With remainder to fixed income vs dividend stocks. No matter your age.
Fine Tuning Stock Allocation Based On Risk Tolerance
Each of the methods I just described offers just a starting point. However, you can take it one step further. And factor in your risk tolerance.
For example, if you are highly tolerant of potential losses and volatility in the stock market. In exchange for the greater potential for return on investment.
Then allocate a larger percentage of your assets to stocks. Just make sure you are investing for the long-term returns stocks provide.
Because in the short term, stocks can and will go down. However, over the history of the U.S. stock market, stock prices have always gone up.
On the other hand, for those who are risk-averse. And lose sleep at night when the stock market goes down.
Then, by all means, reduce your allocation to stocks. And do so to a level, you are comfortable with.
Okay. With asset allocation to stocks taken care of. It’s time to determine your dividend investing strategy.
Because we need to know exactly what percentage of your portfolio should be in dividend stocks.
Choosing Your Dividend Stock Investment Strategy
The way I see it, there are 3 types of dividend stock investors. Let’s review each one…
The Dividend Income Stock Investor
In this category, we have all the fanatic dividend stock investors.
Those who believe that dividend stocks are the only kind of stock to invest in. They drool over the prospect of investing in Dividend Kings and Dividend Aristocrats.
For what it’s worth, I fall into this category.
Why?
Because I won’t buy a stock unless it pays a dividend.
As a result, the dividend income-focused investor will choose to invest 100% of their stock allocation in dividend-paying stocks.
Now, I’m not trying to tell you whether this strategy is right or wrong. It’s just one way to go about stock selection. And it’s the way I choose to go about it.
The most important thing is to pick a stock investing strategy. And stick with it.
Because jumping around to follow the latest hot investing trend. Well, that is rarely a good idea.
Next, we have the other extreme…
The Growth Investor
This is the type of investor who is hyper-focused on investing for growth rather than income.
This investor doesn’t want anything to do with dividends. They prefer to invest in non-dividend paying stocks. Because of the rapid capital appreciation potential they possess.
Thus, they prefer micro and small-cap stocks. Start-up businesses too.
None of which typically pay dividends. On the other hand, they have tremendous growth potential.
Although, not a stock, I will throw cryptocurrencies into the conversation here.
It is an option that has demonstrated excellent growth potential. But, an investment without a dividend.
So, a growth-focused investor will allocate a zero percentage to dividend stocks in his or her portfolio.
Next, we have the middle ground…
The Growth And Income Investor
This investor pursues both growth and income. He or she does not fall into either of the two extremes I just described.
They shoot to have about 50% of their stock portfolio allocated to dividend stocks. The other 50% is focused on non-dividend paying growth stocks.
Of course, there is no magic to the 50% allocation. It can be altered in one direction or the other.
To emphasize growth versus earning more dividend income. Or, vice versa.
Okay. So far, I have described a way to come up with how much of your portfolio should be in stocks. And what percentage of those stocks should pay dividends.
Now, let’s put the concepts into practice to bring them to life…
Percentage Of Portfolio In Dividend Stocks: Examples
And do so by looking at a couple of examples.
Example 1: Determining What Percentage Of Portfolio Should Be In Dividend Stocks
So, let’s say we have a 30-year-old investor. She doesn’t have much money to invest. But wants to get started saving and investing for her future.
So, looking at the rule of 100 minus her age. It tells her to allocate 70% of her portfolio to stocks.
However, she is new to investing. Also, a little timid about risking too much of her money in the stock market.
So, she decides to allocate only 60% of her assets to stocks.
Also, she is interested in dividend stocks. But desires to invest for growth too.
As a result, this young lady has chosen a growth and dividend income strategy. And she elects to play it right down the middle.
Thus, allocating 50% of her investment in stocks to dividend-paying companies. Her portfolio looks like this:
- Cash and bonds 40%
- Dividend stocks 30%
- Growth stocks 30%
Here’s one more example. Then I will wrap it up.
Example 2: How Much Of Your Portfolio Should Be In Dividend Stocks?
This time we have an older gentleman 70 years old. He is retired, has a pension, and collects social security.
Since his income needs are taken care of, he wants to invest aggressively. And leave his investments for his children someday. Furthermore, he is very tolerant of investment risk.
So, he decides to allocate 80% of his portfolio to stocks. Leaving the remaining 20% in cash and bonds.
Also, he is a big believer in investing for income from dividend-paying shares. Leaving only a small fraction of the portfolio for more speculative investments. Mainly to play around with as a hobby in a separate account.
Thus, he chooses to allocate 70% of his portfolio to dividend stocks. And his asset allocation looks like this:
- Cash 20%
- Dividend stocks 70%
- Growth stocks and alternative investments 10%
Okay, now you have a way to figure out “how much of my portfolio should be in dividend stocks”.
So, it’s time to wrap up. Allow me to offer a few parting comments.
What Percentage Of My Portfolio Should Be In Dividend Stocks?
To determine how much of your portfolio should be invested for dividends, first determine your allocation to stocks. Then choose your dividend investing strategy.
The options range from 100% to zero. And anywhere in between. Hopefully, I have shared a thought process for you to decide for yourself.
The most important thing is to make a mindful decision. Understanding your risk tolerance.
Then pick a dividend investing strategy and stick with it for the long term. Fine-tuning your decisions as your unique situation changes.
More Reading About Dividend Stocks And Dividend Investing
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My Favorite Tools For Investing In Dividend Stocks
For investing and money management tools, here are some of my favorites…
Trade stocks fast and for free using the powerful Webull app.
Get recommendations on the best dividend stocks. And when to buy them. From the Simply Investing Report & Analysis Platform.
Manage your entire financial picture in one place for free. Including your spending, budget, and investments with Personal Capital.
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.