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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8587  
Subject: Re: Van Knapp on Diversification Date: 2/10/2013 1:36 PM
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If you focus on the dividend stream, you come to see that you can get basically the same results from a variety of stocks, so why not spread the risk of possible dividend cuts across more of them, simultaneously reducing the amount of income at risk from any one of them? I don't see it as trading risk for rewards, but rather as reducing risk without reducing the dividend rewards.

You can get a similar dividend from a variety of stocks. But you are not necessarily reducing the risk to your income by increasing the number of stocks you hold. Adding lower quality dividend companies to your collection will likely put your income and capital appreciation more at risk rather than securing it. And this, it seems is exactly what this author has done. He added Darden restaurants. Darden has been having a hard time of late and their earnings have been disappointing. However what is more relevant if the dividend is your main concern is that last year they couldn't even pay their dividend entirely from their free cash flow, which potentially puts the dividend at risk.

The maximum position size was reduced from 20% to 15%.

If you don't let your winners run you are much less likely to achieve superior returns. But back to dividends. The two stocks over his new limit were Pepsi, and MacDonald's, which presumably he trimmed to buy Darden and Omega Healthcare. Both Pepsi and MacDonald are superior companies and the chances of either cutting their dividend, let alone not raising it, are negligible. I would imagine both Pepsi's and MacDonald's earnings, dividends payments, and stock prices will be higher in ten years. The same can't be said about Darden and Omega.

This author appears to be chasing yield by "diversifying" into lower quality companies. All but novice dividend investors know not to chase yield and that quality and predictability trumps.

kelbon
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