Why Setting An Upper Limit To Individual Stock's Allocation Within The Portfolio Is Crucial For Dividend Investors In Singapore

If you are a dividend investor in Singapore working towards Financial Independence, Retire Early (FIRE), you are likely already focused on building a passive income stream that can cover your expenses without the need to rely on active employment.  However, generating consistent dividends is not just about stock selection, it is also about how you allocate your capital across different individual stocks.

Many retail investors, including myself in the past, overlooked this crucial piece of the puzzle, only to find themselves overly exposed to risk or receiving unpredictable income streams during market downturns.  In this post, I will share my perspectives on why individual stock allocation matters, how it affects your sustainability in FIRE, and what a prudent allocation strategy might look like.  Do note that the following are not absolute.  Individual investor can further fine-tune the numbers to suit your personal risk appetite.   Of course, this will be irrelevant to investors who prefer index passive investing.  Personally I do not like index investing for my dividends portfolio as I prefer to have control over the companies and their respective allocation within my portfolio according to my preference.  For my US Growth Portfolio, I do invest in ETFs like VOO, VTV and FXI.

Why Portfolio Allocation to Individual Stocks Matters

1)     Mitigates Company-Specific Risk

Even if one is investing in "blue-chip" dividend stocks like DBS, ST Engineering (STE), or CapitaLand Integrated Commercial Trust (CICT), putting too much weight on a single company can backfire.  Companies face operational risks — scandals, declining industries, regulatory shocks, or poor management — which can lead to dividend cuts or capital loss.  One painful example is Hyflux, which used to be a dividend darling but ended in disaster, wiping out investors' capital.

By diversifying across multiple dividend-paying companies, the impact from any one single stock underperforming will be diluted.

2)     Smoothens Dividend Income Stream

Different companies have different payout cycles and yield stability.  Some REITs and companies pay quarterly, while others pay semi-annually.  If one's portfolio is too concentrated in a few names, the dividend cash flow could be lumpy or at risk of sudden income cuts.

The possible solution will be to allocate capital across different sectors (banks, REITs, telcos, consumer staples) with staggered payout dates to create a more predictable dividend calendar.

3)     Protects Against Sectorial Risks

Singapore’s market is heavily tilted toward sectors like banking, property and REITs.  While these are good dividend sectors, overexposure makes your portfolio vulnerable to cyclical downturns.  An example will be the REITs' sector.  From 2010 till 2020, REITs had a spectacular performance in share price and dividend returns.  However, interest rate hikes beginning in 2022 hurt REIT valuations and cash flows.  If one's portfolio was fully allocated to REITs without diversification due to the great returns prior 2020, then the portfolio will be very negatively impacted from 2022 onwards when the REITs sector had been on a downtrend ever since.  

A well-allocated and diversified portfolio avoids putting too many eggs in a single sector basket, providing resilience when a whole sector gets hit.

4)     Supports Long-Term Capital Growth

FIRE is not just about income, preferable one would also want their capital to keep up with inflation.  Dividend stocks with reasonable payout ratios and growth potential (like DBS, OCBC, STE or global dividend growers like Microsoft) can deliver both yield and capital appreciation.

Good allocation allows you to balance high-yielders (for income now) with dividend growers (for income later).

Optimal Allocation Strategy for Dividend Investors on the FIRE Journey

Here are some tested principles, especially relevant to Singapore-based investors (and previously shared by many experienced dividend investors):

1)     Core-Satellite Approach

a)     Core (60–80%): Stable, high-quality dividend stocks with long-term track records (example DBS, OCBC, UOB, STE, ParkwayLife REIT, CICT).

b)     Satellite (20–40%): Higher-yielding or more speculative picks (example CapitaLand Ascott Trust and Aims Apac REIT), international dividend stocks (example Microsoft, JP Morgan and Alphabet), or small/mid-caps with room for growth (example Riverstone and Kimly).

This provides balance, with steady income from the core and growth or yield enhancement from the satellite.

2)     Max Allocation per Individual Stock: 5–10%

A good rule of thumb is:

• Maximum 10% for blue-chip or “core” stocks

• Maximum 5% for speculative or high-yield stocks

This prevents your FIRE cash flow from being over-reliant on any single company.  Personally however, I have currently broken this rule.  My allocation in OCBC is nearing 15% and STE has reached almost 17% of my portfolio (based on market value) as their share prices propelled this year, while REITs continue to underperform.  Besides these 2 companies, the allocation of other stocks in my portfolio are rather in line with the rule above.  However I am hesitant to sell the shares to rebalance, therefore I will probably inject capital and reinvest all dividends into other stocks only.  I also hope that interest rate cuts can materialize soon so that my portfolio can rebalance itself once again when REITs recover.  I believe STE and OCBC are still great businesses in Singapore at least in the near term, thus I am not too worried for now even when their allocation is too high.

3)     Diversify Across Sectors

Aim to allocate across at least 4 to 6 sectors, such as:

• Financials (example banks)

• Real Estate (example REITs across different types: commercial, healthcare, industrial)

• Utilities/Infrastructure

• Consumer Staples

• Telecommunications

• Global exposure (example US dividend aristocrats, HK/China H-shares)

This reduces systemic risk from any single sector or geographic market.  I think my portfolio is still rather diversified, though I have no direct exposure to Utilities and Telecommunications via direct purchase of company shares, but I believe they may be included in VOO, VTV and FXI ETFs.  But currently I am comfortable with my portfolio and I intent to add on to existing shares to make my portfolio more stable, before even considering to add more companies.  As of now, I am happy with 24 shares and ETFs in my portfolio.

4)     Dividend Yield Target: 4 to 6% Overall

Dividend investors will want a balance between:

• High-yielding stocks (6–8%) for current income

• Mid-yield growth stocks (3–4%) for future dividend growth and capital gains

One's average blended yield should be around 4 to 6%, sustainable and inflation-beating.  Currently my projected portfolio dividend yield based on market value is around 4.5% (blended yield is 6.2% based on capital).  This yield is a comfortable yield, probably lowered due to my relatively high allocation to ParkwayLife REIT.  However, I prefer an overall stable portfolio over a yield-chasing portfolio.  4.5% yield is still good in the long term.

5)     Review and Rebalance Semi-Annually

As stock prices and dividend yields change, so do allocations.  Rebalancing helps one to:

• Trim overweight positions

• Reinvest into undervalued quality names

• Adjust for dividend cuts or changes in company fundamentals

This ensures one's portfolio to stay aligned with one's FIRE goals.  I have completed portfolio rebalancing twice earlier, trimming my allocation to REITs and boosting my allocation to non-REITs.  Hoping this allocation will help to boost my portfolio value to higher highs in time to come.

Many investors spend time hunting for the next best dividend stock, but neglect how much to invest in each.  A strong, sustainable FIRE portfolio is not just built on good stocks, but thoughtful allocation that protects your income stream and supports long-term growth.

As a Singapore-based dividend investor, using a structured allocation strategy will give me the confidence to withstand market turbulence, enjoy steady passive income, and achieve FIRE on my own terms.  Barista FIRE, here I come...!