How I let Diversification Suffer for a Stronger Portfolio

Diversification isn’t always the goal. Successful investing is. Read how I let one holding represent 25% of the Freedom Portfolio.

I believe in and have told others to diversify, diversify, diversity their portfolios. I understand the need for multiple holdings, multiple industries and even (maybe) multiple countries for my positions.

I now find myself in a position of what I call strength in my portfolio in that I am highly confident it will meet my financial goals and continue my enjoyment of life with Financial Independence. That strength and confidence comes from VIOLATING the principal of diversification.

Warren Buffet is famously quoted as saying, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” I am not saying I am an expert, but I do think I’ve spent enough time analyzing my holdings, their industries and the markets that I’m comfortable with ONEOK, Inc. (OKE) representing 25.37% of the Freedom Portfolio.

I bought my first position in OKE in April of 2016 as a new position when I bought 342 shares at $28.92 for a $9,890.64 investment. I thought of a position back then as a $10k holding. I figured getting into each position at $10k would be guard rails insuring diversification.

What happened? I watched ONEOK as an equity position increase in price from that initial $28.92 per share to a high of $74.87 in December of 2019. A 250% return on a dividend investment in three years. Awesome!

During that 3 years OKE also returned $2,568.74 in dividends. For holding it just 3 years and a quarter, OKE returned a quarter of my investment in income. Income I reinvested each quarter compounding my returns.

Fast forward to this year, OKE crashed just like the rest of the market and hit a low of $21.81 per share. A horrible event if I had sold. Instead, I took a hard look at the company again, read a lot from the community and decided to invest more. This time I was going in hard and invested $69,971.56 for another 2,564 shares at $27.29. Was I crazy? I just threw everything I knew about diversification out the window.  I also thought I was making a critical move for my family’s wealth building future.

In June of this year, I invested another chunk and bought another 315 shares at $31.58 for a total of $9,947.70. I just could not resist the 12-14% percent yield on a company I was willing to buy at a 5% yield. Talk about cheap. This fit all my criteria for what I consider a core holding.

Altogether, I have $89,809.90 invested in OKE right now representing 3,577.7094 shares including 356.709 from reinvesting dividends. OKE is currently trading at ~$38-42 range per share giving me a total position around $143k for a 62% total return in just 4 and a half years. ON A DIVIDEND INVESTMENT!

Folks, that is winning.

Looking forward, I see no real issues with OKE continuing to meet their dividend. Each Quarter I will see almost another 100 shares through reinvestment or $3,500 per quarter moving forward in dividend income. I will keep reinvesting for the next five years until I start drawing the income from the Freedom Portfolio.

If OKE reaches a price that would push the yield down to a more normal 3-6% range, I would probably find other stocks to reinvest the dividends into but for now I’ll stick with the 10% yield. If some information comes up that would change my mind about OKE’s prospects in their business or they cut their dividend I’d probably consider rebalancing but for now I have the confidence OKE will continue to be a very large part of my life in Financial Independence.

What are your thoughts on diversification?

Do you think you would ever let a single holding represent a Quarter of your portfolio?

Got a similar story of a home run you’ve hit?

Did the downturn in the Spring help or hurt you in the long run?

Thanks for reading.

Projecting Dividend Income

Watch how I plan to grow my portfolio from $40k in income to $80k in income over 5 years. All passively.

You want to know what real freedom is? For me, it is watching my income grow while I do absolutely nothing while the businesses I own earn money and reward shareholders. The rest of freedom is pursuing a life of adventure, enjoying family or doing nothing at all. All things I sacrificed early in my career to earn enough to save enough to be retired at 55.

If your serious about living off passive dividend income in retirement, at some point before you retire you should have sat down and taken a hard look at your holdings. That hard look includes deep diving into a:

  1. Reasonable understanding of where the company’s revenue is made
  2. Where profits come from
  3. How capital spending leads to growth
  4. How much free cash flow is really available for shareholders
  5. The dividend’s coverage ratio and what that means

Once you have done that, regularly keeping an eye on what the investing community says about the stock will make more sense. If you just read analysis or pundits, you have no basis to agree or disagree with whether you should take a position or keep holding a stock.

If you’re not willing to put in the work, stick with index funds.

When you have done the work and you think you know your portfolio the next question is will the dividend income meet my future needs. To do this with any chance of success in reaching the crossover point, where your income exceeds your expenses, you must make some guess as to where you believe the income will be at points in the future.

Otherwise, you could find yourself welcoming shoppers at WalMart when you planned on being at the beach. Not a place I hope to find myself in.

Projecting that income is not an exact science. It requires variables that do not remain static over a period. You must make some assumption on stock prices, dividend growth rates and even whether you think the company can safely pay the dividend in the future. 

To keep it simple, let us look at generic numbers over a single year with a $1000 investment. Assume 100 shares of XYZ at $10 per share with a current 5% dividend yield reinvested each quarter. We want to know how much that 5% means in real dollars for the year.

In the 1st quarter, we get 12.5 cents per share for our 100 shares for a total dividend of $12.50. Those shares are reinvested at a price per share of $10.10 reflecting a 1% gain in stock price for the quarter. We now have 1.24 new shares.

In the 2nd quarter, we get 12.5 cents per share for our 101.24 shares for a total dividend of $12.655. An increase in income of 10.5 cents. Those shares are reinvested at a price per share of $10.10 for  a flat quarter. We now have 1.25 new shares.

In the 3rd quarter, we get 12.5 cents per share for our 102.49 shares for a total dividend of $12.81. An increase in income of 15.5 cents. Those shares are reinvested at a price per share of $9.9 reflecting a 1.98% loss for the quarter in market price per share. We now have 1.294 new shares.

In the 4th quarter, we get 12.5 cents per share for our 103.784 for a total dividend of $12.97. An increase in income of 16 cents. Those shares are reinvested at a price per share of $10.12 reflecting ~1% gain for the quarter. We now have 1.28 new shares.

So for the year, we project $50.94 in total dividends. 94 cents of increased income and total new shares of 105.064.

This scenario included no increase in dividend. Every position I hold has at least an annual increase of 2% with some increasing their dividend by over 10% per year. I ignore dividend growth when I project income because it isn’t guaranteed, and I like a natural conservative variable to give myself a crossover cushion. For some real numbers, because no one is counting on retiring with just $1000 of investments if the same scenario is applied.

At $10,000 invested you would have $509.40 in annual income.

At $100,000 invested you would have $5,094.00 in annual income. The first $100k is the hardest but with that income it starts growing faster and fasters.

At $500,000 invested you would have $25,470 in annual income. That is starting to cover some serious expenses.

At the mythical $1,000,000 invested you would have $50,940 in income. Probably not enough for most people to retire at a lifestyle but lifestyle is your choice.

My personal projections for the freedom portfolio in 2021 are to generate $40,436.70 in dividend income. 100% of that without any new Capital and without me lifting one finger in anything resembling work. Just the way I like my income, free of effort.

In the next 5 years while the portfolio sits and reinvests, and dividends are increased I conservatively project the Freedom Portfolio to throw off over $80,000.00 in annual income. $80k without working and even when I am asleep.

Stick around and watch how that works out for me. Maybe we can all learn something.

How do you project your income?

Thanks for reading!