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.
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.
Disclosure: The author is long AAPL, CVX, F, GE, JNJ, KO, MCD, MO, MSFT, NLY, T, XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.