Weighting a Dividend Growth Portfolio

My dividend growth stock portfolio is equally weighted by sector, more or less, which is quite different from standard market indexes. But I’ve been thinking recently about how I might go about weighting a dividend growth portfolio, or if it’s even worth it.

There are many different ways to weight a general stock portfolio and I’ve summarized a couple below.

Market Capitalization Weighting

This is calculated by taking the number of outstanding shares of each company in the index and multiplying out by the price of each share. This is why large companies such as Apple and Exxon can affect the value of the S&P Index since they contribute a larger percentage than smaller companies.

Price Weighting

Or you can simply take 1 share of each company instead of using the number of outstanding shares. So the weighting is really a percentage of each company’s stock price as a percentage of the total stock prices in the index. The Dow Jones Industrial Average uses this method.

Fundamental Weighting

A somewhat controversial weighting method is using fundamental data instead of price e.g. based on company sales, earnings, book value, cash flow or dividends.

Current Sector Weights by Market Capitalization

So there are any number of techniques which can show any number of results. Here’s a look at the more typical Market Capitalization method based data available at Fidelity.

1. Information Technology19.3
2. Financials16.44
3. Health Care13.9
4. Consumer Discretionary11.73
5. Industrials10.40
6. Consumer Staples9.87
7. Energy9.31
8. Materials3.40
9. Utilities3.2
10. Telecommunications2.45

But what about the dividends?

Being focused on dividends, I don’t personally care about matching any of the above market weights. Market weighting which includes values of companies that don’t pay dividends isn’t something I’m that particularly worried about. What I do care about is simply if the companies I hold will continue to pay and grow their dividends, and the impact if they don’t.

The Financial sector has 21 Dividend Champions according to the Dividend Champion List and this is higher than the 16 Dividend Champions in the Consumer Defensive sector. So you could possibly make the case that you should own more Financial stocks than Consumer Defensive ones. While researching this topic I realized FerdiS had already done a similar analysis on his blog which is worth a read.

But what did get my brain cell wondering, was how many companies are there in the main US markets to begin with? And of those, how many even pay dividends and how many go on to become Dividend Champions?

Here’s the number of Dividend Champions in the current Dividend Champion List by sector. It looks like this

Sector# Champions%
1. Financials2119.6
2. Industrials1917.8
3. Consumer Staples1615.0
4. Utilities1615.0
5. Consumer Discretionary1110.3
6. Materials1110.3
7. Energy43.7
8. Health Care43.7
9. Information Technology32.8
10. Telecommunications21.9

Looking at this you might think that it’d be best to hold more Financial Stocks because they have more Champions and are apparently more stable over the long term. After all, money is their business right? But statistics can be misleading and always be careful when looking at numbers without context. If I said there were only 4 Energy companies and 1000 Financial companies, you may reach a different conclusion.

So does a stock in the Financial sector have a higher chance of reaching Dividend Champion status than say a stock in the Energy sector?

A simple assumption

Keeping the general caveat about assumptions in mind, I’m going to make a broad generalization that a company paying dividends has the general objective of wanting to grow and make so much money that it can increase its dividend each year, for ever.

Here’s a count of the total number of stocks that pay any dividends in each sector. These numbers are based on the stock screener at Fidelity.com searching for dividends per share of $0.01 or higher.

SectorTotal # of Stocks# Paying Dividends%
1. Utilities1068681.1
2. Financials84458469.2
3. Industrials64728544.0
4. Consumer Staples2018743.3
5. Materials36112935.7
6. Consumer Discretionary68224235.5
7. Telecommunications602135.0
8. Energy36912132.8
9. Information Technology87516218.5
10. Health Care787769.7

81% of Utility stocks pay a dividend, which isn’t so unexpected since the Utilities sector is known for dividend payments. The Health Care sector is pretty bad for paying dividends as a whole and the IT sector isn’t much better.

This isn’t a market weighting as such; it’s just saying that if you pick a Health Care stock at random, you have about a 10% chance that it pays a dividend.

I was exaggerating earlier when I mentioned about 1000 financial stocks and 4 energy stocks, but there actually are 4.8 financial dividend stocks for every energy dividend stock, so it makes the Financials sector a lot less attractive than the numbers might otherwise show.

Weights as a percentage of dividend stocks

In the following table I’ve included the Dividend Champions, Contenders and Challengers including the number of “failures” – companies which didn’t manage to continually increase their dividends for at least 5 years. This is calculated as the number of Dividend paying companies in each sector minus the total Champions, Contenders and Challengers for that sector.

SectorDividendChampionsContendersChallengersPayersFailures% PayersWeight %
1. Utilities8616299543262.817.2
2. Consumer Staples87161712454251.714.1
3. Telecoms2122591242.911.7
4. Energy12142225517042.111.5
5. Health Care7641210265034.29.4
6. Consumer Discretionary2421119427217029.88.1
7. Materials129111610379228.77.8
8. Industrials2851936258020528.17.7
9. Financials58421685814743725.26.9
10. IT162318123312920.45.6

The “% Payers” column is the percentage of companies growing dividends for 5+ years out of all dividend paying stocks for that sector. The “Weight %” is that percentage value as a percentage of all other sectors or normalizing the results to a total of 100%.


Here’s a simple illustration of the differences between the weighting methods.

A comparison of weighting sectors by market capitalization vs. number of dividend growth stocks.

You can interpret these results in many different ways. If Financial stocks are more likely to fail to become Dividend Champions as the numbers above suggest then you could make a case of needing to hold more individual stocks in the Financials sector because there’s a higher chance that once of them may fail compared to another sector. I’m just not convinced that there’s any real relationship between market capitalization and ability for a company to pay dividends.

So I’m not making any change any portfolio weighting based on this research; I was merely curious what it might show. I’m sticking with my general rule of not letting any one stock pay more than 5% projected dividend income.

Quote of the day

My grandmother started walking five miles a day when she was sixty. She’s ninety-seven now, and we don’t know where the hell she is.