You are new to investing, and you ask yourself how many dividend stocks you should have in your portfolio?
I know that everything about investing might overwhelm you. Everything seems complex. Which dividend stocks should you buy? Where should you buy them? You think of the last financial crisis, and you don't want to lose money. So you hesitate.
But, you also know that your money is not generating returns in your bank account or under your pillow. It will lose value if you keep it there. Banks start implementing negative interest rates for storing your cash, and inflation will steadily reduce your buying power. Not good.
Investing in stocks can help you with this. In this article, I want to look at how many stocks - dividend or not - you need to achieve whatever financial goals you set. And at the end of this post, I will show you that investing can be very easy for beginners too.
How to find the right number
Whenever opinions are involved, everyone has his own. That is the same for most (private) investors when talking about the number of stocks you should own in your portfolio. But, there is no single perfect number.
The keyword here is diversification.
You have probably heard of the saying Don't put all of your eggs in one basket. If you drop the basket, all your eggs are lost. If you had put your eggs in multiple baskets, many eggs would have survived. That is also true for investing.
Owning 20 stocks instead of only one stock reduces the risk of losing all your money while still getting similar returns as a non-diversified portfolio.
You might argue that you could have put all your money in Amazon and would have done very well over the last years. True. But what if you picked the wrong stock, absolute favorites such as Wirecard, Worldcom, or Enron? You would have lost all your money.
Now you may think: What if I only invest in dividend aristocrats then? These winners have a stable business model, pay dividends for 25+ years, and should be a safe bet, right? It is not that easy. Yes, they must be profitable to pay dividends. On the other hand, what if these companies pay out more than they earn to keep the aristocrat status or have to pay billions because of a lawsuit?
Therefore, your goal should always be to diversify your stocks across industries, sectors, asset classes, and countries.
What is the number you need?
Diversification is great. But if you have too many stocks in your portfolio, the positive impact of one or two rising ones will not show in your returns. Besides, you should have a lot of money to buy the stocks in the first place and time to manage your portfolio.
Too few stocks, however, save you money but expose you to a higher risk of losing everything.
Let's look at the portfolio of Warren Buffet, one of the best investors of all-time. We see that he owns about 50 stocks and appears to be okay with that. Researchers in the 70s also found around 30 stocks to be good enough for significant risk-reduction (not for full diversification!).
Current research shows that you need about 60 stocks for most of the diversification for one market. That said, there are various other markets you need to diversify in. So you would need a lot of stocks to be fully diversified across all markets and industries.
As a beginner, this can be complex. All the time, money, headaches, and effort you have to put in to be fully diversified. Chances are you might be intimidated by choosing even 30 stocks yourself. You stop thinking about it and postpone it to later (read: never)
So considering using an ETF that broadly diversifies across markets and industries which even pays dividends would be a great idea. You would have some small returns that keep you motivated.
An ETF also has two more advantages. It is a quick, easy, and cheap way to diversify with a single buy. Moreover, research showed that owning an ETF that tracks the index (such as the S&P 500) outperforms the best investors in the long run. You don't have to pay high management fees, and you aren't helpless to the fund manager's stock-picking.
So the real question is how much time and money you want to put in and how much risk you are willing to take.
Around 30 stocks and a good diversification should do it and mean less risk. That is good enough for the start since you want to avoid the pain of losing everything. Plus, the willingness to diversify, accepting lower returns, lets you sleep at night. In return, this keeps you invested and gets you closer to your financial goals.