Weighting a dividend growth portfolio – is market capitalization useful?

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.

Sector %
1. Information Technology 19.3
2. Financials 16.44
3. Health Care 13.9
4. Consumer Discretionary 11.73
5. Industrials 10.40
6. Consumer Staples 9.87
7. Energy 9.31
8. Materials 3.40
9. Utilities 3.2
10. Telecommunications 2.45

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. Financials 21 19.6
2. Industrials 19 17.8
3. Consumer Staples 16 15.0
4. Utilities 16 15.0
5. Consumer Discretionary 11 10.3
6. Materials 11 10.3
7. Energy 4 3.7
8. Health Care 4 3.7
9. Information Technology 3 2.8
10. Telecommunications 2 1.9

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.

Sector Total # of Stocks # Paying Dividends %
1. Utilities 106 86 81.1
2. Financials 844 584 69.2
3. Industrials 647 285 44.0
4. Consumer Staples 201 87 43.3
5. Materials 361 129 35.7
6. Consumer Discretionary 682 242 35.5
7. Telecommunications 60 21 35.0
8. Energy 369 121 32.8
9. Information Technology 875 162 18.5
10. Health Care 787 76 9.7

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.

Sector Dividend Champions Contenders Challengers Payers Failures % Payers Weight %
1. Utilities 86 16 29 9 54 32 62.8 17.2
2. Consumer Staples 87 16 17 12 45 42 51.7 14.1
3. Telecoms 21 2 2 5 9 12 42.9 11.7
4. Energy 121 4 22 25 51 70 42.1 11.5
5. Health Care 76 4 12 10 26 50 34.2 9.4
6. Consumer Discretionary 242 11 19 42 72 170 29.8 8.1
7. Materials 129 11 16 10 37 92 28.7 7.8
8. Industrials 285 19 36 25 80 205 28.1 7.7
9. Financials 584 21 68 58 147 437 25.2 6.9
10. IT 162 3 18 12 33 129 20.4 5.6

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.
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.

Previous Purchase – Consumer Defensive Sector


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.

8 thoughts on “Weighting a dividend growth portfolio – is market capitalization useful?”

  1. Interesting analysis for sure because you can’t take the raw numbers at face value. Another wrinkle to the endless possibilities is what kind of current yield and dividend growth you need to be successful. A 60 year old’s portfolio would look drastically different from a 20 year old’s, especially if the 20 year old isn’t striving to retire at a young age. I’m about like you though that I don’t want any one position to contribute a large proportion of my dividends. While I believe that the companies I own will continue to pay and increase their dividends for decades, I’m not foolish enough to believe every single one will do so. So it’s best to limit the damage in case of an unforeseen issue that would lead to a dividend cut.

  2. Hi JC,

    Good point – age and objectives are definitely additional dimensions to portfolio weight. There are so many variables that it’s quite easy to get lost in paralysis by analysis in trying to find the “perfect” weighting or allocation.

    “Don’t put all your eggs all in one basket” is good enough advice for the most part and doesn’t need embellishments such as “put two large brown eggs and one small white egg in the first basket” 🙂

    I’m glad to read that things are progressing well withBaby Luke!

    Best wishes to you and your family,

  3. I like the analysis. I ended up using volatility and CAGR in determining my preferred sector weightings. My order goes Staples > Energy > Discretionary > Industrial > REIT > Healthcare > Utilities > Telco > Financials > Technology.

    1. Hi Youngdiv,

      That looks like a good weighting – it’s ironic that Financials rates so low but I guess both Financials and Technology have been behind two major crashes, affecting both dividend growth and market cap.

      The more I think about it, I like the idea of setting target sector weights by annual sector dividends as a percentage of total dividends rather than market cap and just let the market cap float where it wants.

      Thanks for sharing your approach!

      Best wishes,

    1. Hi DFG,

      I’m in the same boat too as IT is #2 in my portfolio by market cap thanks to Microsoft’s recent invigorated performance. I think you’re fairly safe with IBM though – they’re been around for a while and are more diversified than some of their younger competition.

      Best wishes,

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