Thursday, November 4, 2010

How to Get Rich Slowly DRIP by DRIP: Diversification in a DRIP

Purposes
The purpose of a DRIP (Dividend ReInvestment Plan) is:
1. To growth your net worth with a combination of capital appreciation and reinvested dividends.
2. To supplement your income with a dividend stream that increases faster than inflation.
3. To do these things with minimum transaction costs.

The purpose of diversification is to reduce the risk to your net worth of a failure of any one investment or of a secular decline in any one asset class.

Limits of Diversification
These purposes restrict your investment choices to dividend-paying common stocks and ADR’s (American Depository Receipts). In practice, you’re also restricted to “large-cap” stocks; companies with a total market capitalization of more than $10 Billion. Market capitalization means the market value of all of the shares held by all shareholders.

Unfortunately, few mid-cap and small-cap stocks support DRIP’s.

In addition, I’m restricting myself to DRIP’s with minimum follow up investments of $50 per transaction or less; with a strong preference for $25 or less.

Consequently, the opportunity to diversify your DRIP holdings is limited. You can, however, choose to set up DRIP’s with companies in different industry sectors and from different countries.

My Diversification Plan
Currently, my DRIP portfolio contains:
1. HAS (Hasbro) – an American toy company
2. SJM (J M Smucker) – an American food company
3. CTL (CenturyLink) – an American telephone company
4. JNJ (Johnson & Johnson) – an American pharmaceutical & medical equipment company

I’m also planning to add:
5. BHP (BHP Billiton) an Australian mining company.
6. A suitable non-US oil & gas company.

Ideal Portfolio Size
I think a DRIP portfolio of from 5 to 10 stocks is ideal. More than that would be cumbersome – you’d be better off using a brokerage account.

Less than 5 is okay – especially at first. But, I think your intention should be to diversify over time. It really doesn’t require more money to diversify your DRIP portfolio. You just have to allocate where your monthly investment money goes. For example, if you have only $25 per month to invest, you can invest in a different stock each month or each quarter or each year. You’ll end up with fewer shares of each stock but with the same investment stream you can have a five stock portfolio instead of just one.

Speaking of allocating your investments – the next post will cover Asset Allocation in your DRIP portfolio.

Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP

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