How to Strategically Allocate Dividend Investments

Updated: October 25, 2023


In this article, I will provide guidance to dividend investors on how to strategically allocate dividend investments for income. It's crucial that dividend investors know how to analyze and pick the right dividend-paying stocks, but also invest in a way that can generate the most reliable dividend income while maintaining their risk-tolerance levels.

If you haven't already, be sure to read "How to Invest in Dividend Stocks for Income," to develop a better understanding of dividend investing, as this article focuses more on the dividend allocations you should follow.

This article will be written from a conservative investment perspective. In other words, I will attempt to give you a relatively safe dividend investing strategy that is proven to work while still providing substantial long-term returns.

Dividend-Paying Company Stock Allocations

Many dividend investors seek to invest in a large number of companies to better "diversify" their investment portfolio. These investors may see it as "risky" to own a few number of dividend-paying stocks, as they were taught to diversify and reduce risk.

Although you should definitely diversify your investments, both in different companies and industries, investing in too many companies may actually bring more harm than benefit. This is because if you were to purchase a blue-chip stock that has been around for a very long time, and may likely be around forever, you'd be minimizing your risk tenfold. Moreover, these blue-chip stocks typically include a diversified portfolio of products, services, and revenue streams. Very few, if any, of the large cap dividend-paying companies are making all of their income on one particular product or service.

A good example of this is Disney (DIS), and how it operates in four different business segments: Media Networks, Parks Experiences and Products, Studio Entertainment, and Direct-To-Consumer and International.

What this means, is that Disney generates revenue from its theme parks and Disney-branded products, its television avenues and film productions, and from its recently launched Disney+ subscription service, among other areas. Therefore, if you were to purchase stock in Disney, you would have exposure to a variety of industries, but primarily the media and entertainment industry.

Here are three reasons on why you should avoid investing in too many dividend-paying companies:

  1. You will be less confident in the investments you choose, as these newer investments are likely lower quality than your initial few investments.
  2. You would likely not be purchasing these dividend-paying stocks at the best prices and may be purchasing overpriced stocks instead.
  3. You will have trouble following every company's major news, management decisions, financial statements, dividend increases, stock prices, and more.

In short, diversify your investments in dividend-paying stocks appropriately, but do not diversify too much, or it will harm your dividend portfolio in the long-run.

To provide an example of what diversification would look like for different investment budgets, see the table below:

Therefore, if you were to allocate $10,000 to dividend stocks and purchased equity in 10 different dividend stocks, I would classify this as over-diversification. However, if you did the same with anywhere over $30,000, this spread is more reasonable.

Company Market Caps

If I were a beginner to the dividend growth investment strategy, or if I had ~$10,000 or less to invest in dividend-paying companies, I would stick to only blue-chip dividend stocks.

As discussed previously, through targeting large market cap dividend stocks, you will be able to get an impressive amount of diversification. Companies with large market caps have a lot of different lines of businesses within their own niches. Even if you were to own three large market cap dividend stocks, you would essentially have a sort of mutual-fund effect with a pretty diversified portfolio.

When you invest in a large market cap dividend-paying company, you should ensure that it has exposure to the international markets. The emerging markets, especially in India, and in the future, Africa, may very well increase profitability for those dividend-paying companies who have an international presence.

With larger investment budgets, and after purchasing large blue-chip stocks that are at a fair price, I would begin investing in mid-large cap stocks. Personally, I wouldn't invest in a $3 billion dollar market cap or lower company, to minimize risk and to ensure sustainable dividends.

I would also ensure that the company I am investing in, regardless of the market cap size, has a very manageable amount of debt. Interest rates have been low in the last decade, which has encouraged spending with companies typically taking on more debt. However, it will not always be this way, and not all companies manage their debt wisely. For example, some companies take on debt to buyback shares to increase their earnings.

Recession-Proof Staple Industries

After you know how many dividend-paying companies you'd like to invest in, it's important that you invest in companies that are in the right industries, to ensure long-term dividend growth, and to minimize risks of the dividend being cut.

Look at the safest dividend investment industry list below, starting from the top, and compile a list of dividend-paying companies that you are confident investing in. These should be companies that you have thoroughly researched and vetted.

  • Consumer non-cyclical food and beverage
  • Consumer non-cyclical basic needs
  • Healthcare
  • Industry
  • Regulated Utility

Then, from a conservative investment perspective, I would invest at least 60% of my dividend portfolio in stocks from your list that are either in consumer non-cyclical(s) or healthcare industries. Dividends from blue-chip companies in these industries are extremely stable and are unlikely to be cut.

I would then invest the other 40% into the other industries provided in the list (industry and regulated utility). This would only be the case if I had a larger investment budget ($25,000+), to better diversify my dividend portfolio. However, if I had a smaller investment budget (below $15,000), I would only focus on investing in consumer non-cyclical and healthcare dividend-paying companies. This would be to minimize risk and to ensure long term dividend payments.

In the list section below, I will go more in-depth on why you should invest into these particular industries, the advantages they hold, and will provide a few example dividend-paying companies as well.

#1: Consumer Non-Cyclical Food and Beverage

I would begin by purchasing one consumer non-cyclical food and beverage stock. These are stocks that will, in general, have a consistent level of demand, unlike cyclical industry stocks.

Regardless of the economic situation we are in, people will always need to eat food. This makes the consumer non-cyclical food and beverage industry one of the best choices for dividend investors.

Examples include:

  • The Kraft Heinz Co. (KHC)
  • General Mills, Inc (GM)
  • Pepsi-co, Inc. (PEP)

#2: Consumer Non-Cyclical Basic Needs

The second industry I would invest in, would be the consumer non-cyclical in basic needs sector. This includes things people use on a daily basis no matter of the current economic situation. For example, toothpaste, diapers, laundry detergent, tissues, and more.

Examples include:

  • Kimberly-Clark Co. (KMB)
  • Procter & Gamble Co. (PG)
  • Costco Wholesale Corp. (COST)

#3: Healthcare

The third industry I would invest in, would be the healthcare sector. This includes the pharmaceutical and medical devices category. Everyone needs healthcare and most people want to live long healthy lives. I would look for companies that are not only in pharmacy, but have medical devices, and possibly some consumer goods.

Examples include:

  • Johnson & Johnson (JNJ)
  • AbbVie Inc. (ABBV)
  • Medtronic plc. (MDT)

#4: Industry

The fourth industry I would invest in would be in the industry sector. Companies in the industry sector produce things that consumers need, and will continue to do well as the global infrastructure and world population increases. This industry is broad and covers sectors such as aerospace, machinery, and waste management.

Examples include:

  • Boeing Co. (BA)
  • Raytheon Co. (RTN)
  • Caterpillar Inc. (CAT)

#5: Regulated Utility

The fifth industry I would invest in, would be in the regulated utility sector. These companies typically have a lot of debt. Fortunately, this debt is usually very manageable and it's pretty standard for the industry. This debt can be managed because companies in this industry are often considered a "government mandated monopoly" and are heavily regulated.

Examples include:

  • American Water Works Co. (AWK)
  • Duke Energy Co. (DUK)
  • Southern Company (SO)

The yields for the regulated utility company industry are great but don't grow as quickly. Therefore, the starting dividend yields for this industry are usually higher than other industries.

Avoid Investing in Certain Industries

In terms of dividend growth investing, with a dividend portfolio of $25,000 or less, I would completely avoid investing in the following industries:

  • Oil
  • Real Estate Investment Trusts (REITs)
  • Technology
  • Cyclical Stocks
  • Retail
  • Restaurants

With a $25,000 or smaller dividend portfolio, you should only focus on core stocks that are proven, stable, and very predictable. The industries listed in this section, do not fall within these criteria, and can therefore dilute performance.

Many companies within these industries are "B2B companies" and depend on other companies making investments in them to thrive. What this means, is that the dividend these companies pay out may not be sustainable, which is something you don't want as a long-term dividend investor.

On the other hand, for the non-cyclical consumer goods industry, the economy doesn't make much of a difference as there will always be a demand for basic goods and people will always need to eat.

To better understand why you shouldn't invest in these six industries, with a "small" $25,000 or less dividend investment budget, read the below sections.

#1: Oil

No one knows for sure what will happen with oil over the long-term. It's a commodity that will go both up and down substantially.

There's a lot of trends nowadays towards batteries, including solar panels, car batteries, renewable energy, etc., that could potentially place challenges on the oil energy, or "traditional energy" industry over time.

However, oil will always have its uses and will likely not go away for a long time. Regardless, with a $25,000 dividend portfolio or less, I would not take any risks investing in the energy/oil industry, especially considering its volatile nature.

#2: Real Estate Investment Trusts (REITs)

Although REITs are an attractive investment for dividends, I would not expose myself to this industry, as REITs are taxed differently than "qualified dividends" and are more volatile.

Most companies pay out a qualified dividend and this is typically taxed as long-term capital gains. For most people, this is a 15% tax. REITs also avoid double taxation, and as a result, have to distribute a large share of their earnings as dividends. This is then taxed at a much higher rate at an individual level. Often times, this is taxed as ordinary income. Some portion is often treated as a return of capital.

With a $25,000 or lower dividend portfolio, you probably don't want to add more complexity to your tax return, and for no real advantage, when there are many other dividend companies you can invest in that pay qualified dividends.

However, I would definitely invest in REITs with a larger dividend portfolio, as they can be a great source of monthly dividend income.

#3: Technology

Most, if not all, companies these days are exposed to technology regardless of whether they are in the technology industry or not.

For example, the healthcare industry is frequently exposed to medical advances in technology. Consumer non-cyclical companies also use technology, such as automation, to advance or power their companies and make them better.

With a $25,000 or less portfolio, you do not need pure-play exposure to the technology industry. It's too risky and too many companies come in and out of favor. However (again), in a larger portfolio, it would make sense to own a small portion of technology stocks.

#4: Cyclical Stocks

Cyclical stocks can be very difficult to handle and make sense of. As a dividend investor, you want stocks that are stable and consistent, and not fluctuating seasonally.

Therefore, I would avoid completely avoid investing in these stocks for dividends in smaller portfolios.

#5: Retail

Retail is another tricky sector with lots of changes happening. The obvious example is with Amazon taking over retail, which is leading to shops in the mall or physical stores having to pivot their business strategies or file for bankruptcy.

Therefore, I would not invest in retail stocks for dividends in smaller portfolios, but retail companies do make sense in larger portfolios.

#6: Restaurants

I would combine the restaurant industry with retail because things are changing rather quickly in the restaurant business.

With a smaller portfolio, investing in the restaurant industry for dividends is an unnecessary risk to take.

Conservative Modeling Examples

Below is a table of dividend investment forecasts, based on different investment budgets:

Note that you can do this yourself and test different numbers easily with a Dividend Investment Calculator.

For this example, I have the same average dividend growth rate (6%), starting dividend yield (3%), and assumed inflation rate (2.5%). The only difference is the initial investment. In addition, for simplicity's sake, I will not consider these 3 factors:

  • Monthly investment allocations.
  • Re-investments of dividends received.
  • Overall stock price fluctuations.

These are factors which are completely dependent on yourself and on the dividend-paying companies that you've invested in. If you want to see an example that considers more factors, see this article on maximizing dividend investment returns.

Through contributing monthly to your dividend portfolio and reinvesting all of the dividends you receive until retirement (ideally), you will substantially increase your investment pool, which leads to more compounding, and significantly more dividends than what is shown in the table above.

In relation to capital appreciation, dividend-paying companies are typically more stable, and if a majority of the companies you've invested in are blue-chip companies, it's likely that the stock price will continue to increase overtime. Capital appreciation is not something dividend investors focus on too much, but it's a nice bonus to have, and is indicative of consistent dividend growth.

The Bottom Line

To recap, here are the main factors and principles you should follow when investing in dividend-paying companies, regardless of your investment budget:

  • Avoid investing in too many dividend-paying companies.
  • Invest primarily in large market cap dividend-paying companies.
  • Invest in recession-proof industries that will always be around.
  • Invest in other riskier industries only with larger dividend investment portfolios.

Now that you know the principles of conservatively investing and profiting from dividend-paying companies as an income investor, I would recommend learning about the various dividend ratios and financial measures so that you can better evaluate dividend-paying companies yourself.

This will make you into a more confident investor, and one that can independently research and select the best dividend-paying companies, regardless of the current market situation. Moreover, if you follow the guidelines taught in this article for dividend growth investing, you'll be much closer to achieving your financial goals.

Disclaimer: Because the information presented here is based on my own personal opinion, knowledge, and experience, it should not be considered professional finance, investment, or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional.

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