For the past year or so I’ve been dabbling in investing in dividend stocks. At this point I have investments in three individual dividend stocks that I plan to hold for the long term because they’re solid companies with a long history of dividend growth. I also had planned to continue investing in more dividend stocks as extra money becomes available to build my dividend stock portfolio into a well diversified investment machine. I even had the notion that at some point I would have enough diversity in my dividend stock portfolio that I could stop investing in index funds.
Well, I’ve been reconsidering my plan lately. Not because I’m no longer excited by dividend stocks, but because I realize that my plan is incomplete, and therefore a pretty crappy plan.
At it’s core, it seems like a solid strategy: invest only in the companies you deem to be the best investments. You’ll get exposure to them in index funds, but you’ll also get exposure to plenty of companies you’d probably rather not invest in. The strategy allows you to hand pick the companies you think will provide the greatest return in the long run.
But a plan is not a plan unless you have an exit strategy. Suppose I build up my portfolio to 30 dividend stocks. Maybe by retirement my portfolio will spin off enough dividends each month that I won’t need to touch the principal. That would be great. But what if that doesn’t happen? I’ll have to draw it down, and that’s where my plan falls apart. With 30 stocks, I don’t have a strategy for deciding which ones to sell. Knowing myself, I will probably stress a great deal over which stocks to sell off and which to continue holding onto.
Owning shares of 30 different companies also means I’ll need to keep a close eye on all of those companies for the rest of my life to know if I should sell any of them. That’s a lot of companies to keep track of, and could also cause me a bit of stress to manage.
Index funds on the other hand, would allow me to be much more hands-off with my investments and will be infinitely simpler to manage in retirement. I don’t need 30 index funds as I do with individual stocks. 5-10 index funds would give me plenty of diversity, and the decision of which to sell later in life will be a matter of deciding between stock or bond, US or international, etc., rather than deciding between individual companies.
What Do You Invest In?
Do you invest in index funds or do you pick individual stocks? What do you see as the benefits and drawbacks of each approach? If you have a portfolio of individual stocks, how do you decide when you should sell off shares of a company? If you’re already in the draw down phase of life, how do you decide which companies to sell off first?
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