This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

As fractional share buying has exploded in popularity over the past few years, building a diversified portfolio has never been easier. Generally, a good starting point for well-diversified investors is to buy somewhere around 25 stocks.

However, I go well beyond this threshold for the three reasons we will look at today. In doing so, I run the risk of diversifying too much and simply matching the market's returns, yet I remain optimistic I can outperform with a more expansive portfolio.

Now, let's look at why I believe that -- and why owning over 100 stocks helps me sleep at night.

FOMO: Fear of missing out

Most people fear letting their portfolio grow too big as it becomes difficult to keep track of all the moving parts. However, I am odd because I am even more scared of missing out on potential multibaggers -- even if I don't have a deep knowledge of them.

What's more important to me is whether or not a business fascinates me. This fascination can come in many forms. Possibly it's a financial metric that blows me away. Or perhaps it's an industry chart that shows a megatrend providing a tailwind for the company's operations. Or maybe the CEO is an undeniable innovator, and I want to bet on that success.

It can be anything -- as long as I'm fascinated. To put it very simply, I would be more heartbroken to see a stock I admire skyrocket without my having any skin in the game than I would be to own it and see it go to zero. While capital preservation may be paramount to some investors, growth is more important to me, regardless of what volatility I may have to face.

But of course -- and here's the big caveat -- this strategy definitely isn't for everybody, and that's what makes investing unique to each of us and why it is essential to have your portfolio match your temperament.

Adding to my winners

By taking tiny positions (sometimes even $5) in businesses that fascinate me, I do two things:

1. Make sure I don't forget them.
2. Put some skin in the game, however marginal it may be.

With this little bit of skin in the game, I can let these companies I admire percolate on the back burner. Not forgetting about them -- but not worrying about their day-to-day price swings either.

From here, I can add to the position if a stock's investing thesis becomes more alluring and my knowledge of the company grows. But for the most part, I just let the stocks run on their own.

However, once their stock price doubles, I use that as a natural opportunity to do more research on them and, more importantly, add a little to my holding (once again, perhaps just $5). 

And if it triples, I do the same. And if it quadruples, again the same, and so on until it has grown to a position in my portfolio that requires no further investment (i.e., becomes too large of a holding for me to sleep well at night).

This explanation is a long-winded way of saying I water my flowers (or add to my winners) and let them continue to grow.

The best part about "having" to continue to learn about these winning stocks is that I was already fascinated by them at some point or they wouldn't be in the portfolio -- making the added learning fun and not tedious.

Letting losers fade away

In addition to allowing me to add to my winners over time, owning over 100 stocks also offers natural diversification, allowing my losers to fade away into obscurity in a worst-case scenario.

Look no further than Teladoc Health (NYSE: TDOC) and the huge decline I faced as a shareholder. Yet, even with a considerable 4% portion of my holdings allocated to the company, my portfolio remained flat the following day after the company's concerning earnings report, thanks to an otherwise strong day in the market and success elsewhere in what I held.

So now what? Well, in Teladoc's case -- nothing. It still accounts for 2% of my portfolio, so it doesn't necessarily warrant new buying. Down nearly 90% from its all-time highs, there's no real reason to sell here either.

Am I upset with management? Absolutely! However, I am still fascinated by its ideas and its mission statement "that everyone should have access to the best healthcare, anywhere in the world on their terms."

With that said, and regardless of your investing temperament, buy what you love, add to your winners, and leave things alone if possible. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why owning over 100 top stocks helps me sleep well at night appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• Want to build up a second income? These 2 top ASX shares are a buy
• 2 ASX shares I'd much rather buy than an investment property
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Josh Kohn-Lindquist has positions in Teladoc Health. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Teladoc Health. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Dividend-paying stocks in the S&P 500 have historically outperformed their non-dividend-paying index peers. Dividend-growing companies in the index have performed even better. 

So should we buy the highest-yielding dividend-growth stocks in the S&P 500 and call it a day?

Maybe, but there is one last (and less popular) metric that has historically led to outperformance -- the payout ratio. Specifically, dividend-growing stocks that maintain a payout ratio below 50% help create the exact type of stocked pond people like to fish in, offering investors a healthy balance between returning cash to shareholders and funding company growth.

As a result, it's not the top quintile of highest-yield stocks (and their 74% average payout ratio) that outperform at the highest rate, but the second quintile (and its 41% average payout ratio), according to data from Wellington Management.

Let's find out what this means for investors interested in optimizing their dividend strategy.

High-yield dividends, low growth prospects

While high-yield dividend stocks may be alluring at first glance, many tend to have higher payout ratios. The payout ratio is a stock's dividend payout as a percentage of its net income, and it can quickly tell investors how much of a company's profits are going directly back to shareholders.

When these high-yield stocks continue to increase their dividend payments over time, they eventually begin to test the limits of their financial security, paying out bigger portions of their earnings.

High payout ratios typically mean two things.

First, the company will have less money to reinvest back into the business, spending which could have fueled future sales growth, eventually growing the bottom line. Sales growth is a strong indicator of a stock's long-term performance, putting companies with high payout ratios at a disadvantage thanks to their hampered growth prospects.

Furthermore, if a company has a high payout ratio, its dividend growth potential is similarly restricted -- or worse yet, it may need to cut its payout to maintain financial security. While dividend cuts are far from death knells (sometimes even wise decisions), they generally lead to a sell-off in the stock as income-focused investors flee.

S&P 500 companies that cut their dividend not only underperformed their peers over a 48-year period but produced a negative annual return overall, reinforcing the importance of a well-funded dividend.

Low payout ratios, long-term growth potential

On the flip side, stocks with low payout ratios offer a balanced approach between returning cash to shareholders and funding future growth. Thanks to this extra cash available to reinvest in the business, a flywheel effect can take hold.

First, a portion of the excess profits go back into the business, creating new sales that flow through to the bottom line. With this rising net income, the company can increase its dividend, often without raising its payout ratio as profits and dividends paid out rise at a similar rate.

Additionally, if the company still has earnings to spare, management can also consider lowering its share count through share repurchase programs. For example, consider the declining share counts for two great low payout ratio stocks, Lowe's and Union Pacific.

Data by YCharts.

Despite the capital required to maintain their respective operations, these two have not only funded many years of annual dividend increases but rapidly lowered their total shares outstanding over the last decade. Fewer shares make the dividends cheaper to maintain while boosting earnings per share (EPS) -- furthering the flywheel effect.

Because of these benefits, looking for low payout ratios over high yields is akin to choosing longer-term cash flow potential over higher near-term income. 

The best of both worlds

Best yet for investors, a handful of stocks offer relatively high dividend yields and low payout ratios. Let's look at three here:

Source: Yahoo! Finance. Maximum dividend potential = dividend yield/payout ratio. 

Notice that despite not having the highest dividend yield, Intel has the highest maximum dividend potential based on its dividend yield divided by its payout ratio. Similarly, Target has a dividend yield about one percentage point lower than Cummins, but they have comparable maximums.

I bring these three companies up to illuminate the power of a low payout ratio. Yes, you may be sacrificing some near-term dividend income by forgoing high-yield stocks, but your long-term dividend potential should one day dwarf that high initial income if you hold for the long haul.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why dividend stocks with low payout ratios can be better than those with high yields appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• 2 ASX income stocks with rocketing dividends
• Experts are bullish about the potential of this ASX 200 share!
• Want to build up a second income? These 2 top ASX shares are a buy
• 2 ASX shares I'd much rather buy than an investment property
• Top brokers name 3 ASX shares to buy next week

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool owns and recommends Intel. The Motley Fool recommends Cummins, Lowe’s, and Union Pacific and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.