In an earlier article, Strategically Managing Your Dividend Portfolio In A Downturn, one of the tactics mentioned to help manage the risk of a dividend cut was to limit your allocation in any single investment to a maximum of 5%. However, if the allocation is measured by market value, our portfolio may still be at significant risk of a dividend cut. Consider the following:

Below are four of my holdings showing and their percentage of my income portfolio's market value:

• Commercial Net Lease Realty, Inc. (NNN) 5.7%
• Realty Income Corp (O) 4.6%
• Alpine Total Dynamic Dividend Fund (AOD) 4.1%
• Eaton Vance Global Dividend Opportunities Fund (ETO) 5.2%

Both NNN and ETO are slightly over the 5.0% limit, but not enough to be concerned about. However, when I calculate each of these securities as a percent of my total dividend income the results are not as benign, as shown below:

• Commercial Net Lease Realty, Inc. (NNN) 7.9%
• Realty Income Corp (O) 5.0%
• Alpine Total Dynamic Dividend Fund (AOD) 18.9%
• Eaton Vance Global Dividend Opportunities Fund (ETO) 12.2%

Combined, these four securities represent 44% of my dividend income compared to only 19.6% of the market value of my income portfolio. I currently have 43 securities in my income portfolio. If each security in the portfolio were equal weighted, then each security should only represent 2.3% of the whole. How did I get into this position?

I have not purchased any O since June 2007 when it was trading at $26.02. With a 12/19/08 closing price of $24.54, its price has has held up relatively well. My average basis in NNN was $21.42 earlier this year. In November, I purchased some additional shares at $14.24 bringing my average basis down to under $20. NNN closed at $16.57 on 12/19/08.

Three stocks were sold in October that had cut their dividends and this created a significant amount of income that needed to be made up. I strongly suspected that AOD was trading well below its underlying value and purchased a large block of it. At the time it was yielding just under 37%. Ten days later the fund itself confirmed my suspicion in a press release saying they had begun purchasing its own shares.