I have a simple approach to diversification: I buy a specific dollar amount of any new stock I acquire. After that point, I can opportunistically add (usually in steps) to my position but only to a point where my dollar investment is twice my entry level.
I've done just that with Hormel Foods (HRL 0.14%) and Realty Income (O -0.17%), so I'm at my max investment. But if I weren't maxed out, I would still be adding more money to each of these reliable dividend stocks. Here's why.
I have a diversification mandate
Having a diversified portfolio is a very important risk management tool. It stops you from putting all of your eggs in one basket and then dropping that basket. My approach is ultra simple -- when I invest in a company, I buy a specific dollar amount of shares.
This has saved my portfolio many times over since, like every other human being, I make mistakes every now and again. No investment mistake I've ever made, even ones that have left me holding worthless shares in a bankrupt company (or two), has ever had a meaningful long-term impact on my finances. Thank you, diversification!
Image source: Getty Images.
That said, I am open to doubling my cash investment in a company if I believe it is warranted. Normally I do this when a company's stock has fallen for some reason that I don't believe is long-term in nature. Or, to put it another way, as long as my investment thesis is still intact, I'll jump when I think a stock I own is cheap. The limit is that my cash outlay can't go above two times my original investment.
In fact, I just added to my position in Toronto-Dominion Bank. The stock is way above my original investment point, but the yield is back to the point where I first bought in. I think it's a bargain so I added some new cash. Two other stocks that I've added to multiple times, and would continue to add to if it weren't for my self-imposed diversification rule, are Realty Income and Hormel Foods. Here's why.
Wait, I've already maxed out Realty Income...
When I saw the recent price weakness in Realty Income's shares, I got excited. As I usually do, I went to my portfolio-tracking spreadsheet and looked at my history. To my chagrin, I maxed out my investment already. In other words, I would buy it if I could, but I can't. But that doesn't mean you shouldn't.
Realty Income is the largest net lease real estate investment trust (REIT) you can buy. (A net lease requires the tenant to pay for most property-level operating costs.)
It has a heavy focus on single-tenant retail properties, but it also owns industrial assets. There's a fairly notable "other" category in the mix as well, which includes casinos and vineyards. On top of that, the company has been expanding into Europe, a region where the net lease approach is still fairly new and competition is minimal.
Realty Income has increased its dividend annually for 29 consecutive years and yields roughly 5.9% today. That's near the highest levels over the past decade. On top of these positives, Realty Income also happens to have an investment-grade rated balance sheet, providing it advantaged access to the capital markets to support long-term growth.
Rarely has Realty Income surprised me, at least not in a bad way. It is a slow and steady dividend stock that focuses on making conservative decisions across every aspect of its business. Although my diversification rules are holding me back, that's my own personal issue. You can buy all you want.
O Dividend Yield data by YCharts
I've added to Hormel multiple times
When I look at my portfolio today, the biggest red mark by far is Hormel Foods. The stock losing around a third of its value since early 2022 has a little something to do with that fact.
However, that price decline has now pushed the yield up toward the highest levels in the company's history. I try to buy good companies when they seem historically cheap, so I'm already maxed out on my position size here. But Hormel proves that stock prices can keep going lower, which is an opportunity for you if you don't own it (or if you don't hold yourself to a rigid diversification mandate like I do).
To be fair, Hormel isn't hitting on all cylinders today. It hasn't done as well as peers in passing rising costs on to consumers, avian flu has been a headwind in its turkey operations, it bought Planters right as the nut segment was starting to struggle, and China hasn't rebounded as quickly as expected from COVID-19 lockdowns.
None of these problems are, individually, a big issue. History suggests that they will each pass eventually. But having all of the problems hit at once, well, that's tough. It is understandable that investors are worried.
Still, Hormel is a Dividend King with 57 consecutive annual dividend increases behind it. The company has worked through hard times before while continuing to reward investors for sticking around.
And the truth is, it is actually muddling through fairly well this time around. Not only did volume increase across all of its business segments in the fiscal first quarter of 2024, but it is performing relatively well compared to peers in turkey and nuts even though those segments are lagging. I believe that the company's strong execution will eventually result in a long-term business upturn.
One quarter doesn't make a trend, but 57 years does. I'm happy to give management the benefit of the doubt. If you don't own this consumer staples stock, you might want to jump on it while it is still historically cheap.
Life is a sine curve
Business results swing between good and bad over time. If you can find good companies like Realty Income and Hormel which are in a downswing that seems likely to be temporary, you buy them (and sometimes some more). That's what I've done with both of these dividend stocks and if I could, I'd keep doing it. If you don't own these two stocks, you should strongly consider adding them to your portfolio today.
