It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.
When I started investing in dividend stocks for income, I did as most new income investors - I chased yield. To make things worse, I had success early on. At one time I had a portfolio consisting of Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and high-yield, high-risk stocks. The portfolio’s yield was consistently in the low to mid-teens. I remember once being disappointed in buying a stock that only yielded 8%.
As I continued to read and learn about investing in dividend stocks, it became apparent that I was doing it the wrong way. I started to unwind my high-yield strategy and move into more traditional dividend growth stocks. However, the high-yield strategy was still experiencing some success so I did not move as fast as I should and ultimately suffered some unnecessary losses.
My portfolio still carries some remnants of my high-yield investing days with stocks such as:
- National Retail Properties (NNN, Financial) - Yield: 4.7% - Div. Growth: 1.5%
- Realty Income Corp. (O, Financial) - Yield: 5.3% - Div. Growth: 0.3%
- Health Care Property Investors, Inc. (HCP, Financial) - Yield: 5.8% - Div. Growth: 2.3%
Over time the above stocks have proven to be the jewels of my former high-yield investing days. Each of these companies has shown a commitment to growing their dividend.
The focus of my income portfolio is now on blue chip dividend stocks with a long record of growing their dividends. Examples of companies I now follow include:
- Chevron Corporation (CVX, Financial) - Yield: 3.5% - Div. Growth: 9.1%
- The Coca-Cola Company (KO, Financial) - Yield: 3.2% - Div. Growth: 8.1%
- The Procter & Gamble Company (PG, Financial) - Yield: 3.1% - Div. Growth: 5.2%
- 3M Company (MMM, Financial) - Yield: 2.6% - Div. Growth: 6.6%
You will notice the yields on each of these stocks are much lower than those in the first group, but they provide a much stronger dividend growth rate. Over time their yield on cost will grow much faster than the first group, thus stand a good chance of producing more income.
That is not to say I have completely walked away from high-yield investments. Like salt and pepper, I use them to add a little spice to my income portfolio, but in very limited and controlled portions. Here are some high-yield securities that I hold that have performed well for me:
- ALPS Alerian MLP (AMLP, Financial) - Yield: 5.7%
- Eaton Vance Tax Advantaged Global Dividend Fund (ETO, Financial) - Yield: 7.4%
- AT&T, Inc. (T) - Yield: 5.7%
ETO is an ETF's that pays a steady monthly dividend, but cut its dividend back in 2008 during the financial crisis. AMLP is an ETF that has paid a dividend every quarter since November 2010, and has increased is dividend dividend every quarter since February 2011. In addition to its wireless business, T also participates in the declining landline business.
If you invest in such securities, you should understand the inherent risk and limit your exposure. I likely will always have a place in my income portfolio for riskier securities, but as I grow older the place will grow smaller.
Full Disclosure: Long NNN, O, HCP, CVX, KO, PG, MMM, AMLP, ETO, T in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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