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Summary

  • A well-diversified portfolio of mega-cap blue chip dividend champions is vital for the long-term dividend growth investor.
  • There is a place in a solid DGI portfolio for a risk allocation of several higher risk/reward stocks.
  • A budget of always living within one's means is the single most important part of any retirement strategy.

About ten days ago, I wrote this article about how chasing yield could be hazardous to your financial health. The article set off a firestorm of differing opinions about having a completely high yield dividend stock portfolio and the proclivity of the average newly retired investor's failure to maintain a prudent budget. While I firmly believe that a portfolio with ONLY high yield stocks is much too risky for the average investor, I do believe that a well-diversified dividend growth portfolio can include a few dividend opportunity stocks, or high yielders as we have come to know them.

Let's Use Our BTDP Portfolio As An Illustration

As you know, the BTDP was created with dividend winning stocks with somewhat average overall dividend yield of 3.60%, generating an income of about $3,882 annually. If we include a risk allocation of 4 of the 6 stocks that we discussed in the previous article, here is what the chart would look like.

SymbolSharesOrig.YieldDividendYrly Inc.Tot.Cost
T3005.60%1.845529585
XOM1002.80%2.762769005
JNJ1003.10%2.82808678
KO2003.00%1.222447442
PG1003.10%2.412417571
GE3003.60%0.882647305
MCD1003.50%3.243249302
CVX1003.60%4.2842811114
AAPL152.25%13.161977897
MO1005.20%1.921923771
F4003.20%0.52006060
MSFT2002.80%1.122248032
WMT1002.50%1.921927611
PFE2003.20%1.042086436
NLY20010.30%1.22402200
AGNC20011.01%2.65204800
LINE2009.29%2.95806400
PSEC20012.79%1.332662000
xxxxxxxxxxxxxxxxxxxxxx4.28%xxxxxxxxxx5428125209

This expanded version of the BTDP includes the following stocks; AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), General Electric (NYSE:GE), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL), Altria (NYSE:MO), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), Pfizer (NYSE:PFE), plus these 4 high yielders; Annaly Capital (NYSE:NLY), American Capital (NASDAQ:AGNC), Linn Energy (NASDAQ:LINE), and Prospect Capital (NASDAQ:PSEC).

I allocated roughly 4-5% in each of the riskier high yielders and as you can see, the yield has popped from about 3.60% to 4.28%. The income, which of course is the most important element of this portfolio, has jumped from $3,882 to $5,428 annually. The new annual income amount is about 40% more than the original portfolio without the high yielding stocks.

It Is All About Expenses And Risk Tolerance

While I advocate adding a risk allocation to just a few high yielders to a well-balanced dividend growth portfolio, the investor will still need to have a prudent expense budget that takes into account the potential risks of the dividend opportunity stocks.

  • Always spend less than you have coming in.
  • Eliminate as much debt as possible.
  • Re-invest the dividends until you need the cash.
  • When the cash is needed, take only the income received from the dividend stream.
  • Sell shares of each equity only when a significant change occurs within the company, or when re-balancing.
  • Monitor the high yielding stocks much more closely than the mega cap blue chip dividend champions.

The Bottom Line

Opportunity stocks are wonderful additions to a DGI portfolio only as added "spice". If an investor realizes that the income received could fluctuate to the down side (and upside I suppose), then owning shares of the very high yielding stocks is not "chasing them" at all, but will enhance a sound portfolio for various periods of time.

If you cannot handle the risk, nor understand the investments, then I would still steer clear of those stocks.

I myself own some dividend opportunity stocks, but am always ready to pull the trigger if fundamentals change for the worse.

Disclaimer: The opinions of the author are not suggestions to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.

Source: Retirement Strategy: How Owning Higher Yielding Stocks Can Offer Greater Income