Like many of you, I have let the near-zero yields paid by CDs make me allocate a larger amount of my fixed income portfolio into staid and sober, dividend paying stocks.
But because I have become convinced that valuation matters greatly when buying that kind of stock, I have found very little to buy these past few months, even though quite a few of the CDs in my five year ladder are coming due and that money needs to be put to work producing replacement income.
The valuations of the more popular dividend-centered ETFs are too high to attract me right now, as I explained in my articles on the Vanguard Dividend Appreciation Index (VIG) and The Vanguard High Dividend Yield Index (VYM). So I have been cautiously buying shares of individual dividend stocks that I plan to treat as a replacement for a five-year CD.
My requirements for selecting a dividend stock have been that the company be mature, with a large market capitalization, and that it pay a dividend equal to or higher than the 2.5% yield I was getting from my CDs. I will settle for a lower yield, nearer 2% if the company's earnings growth rate is such that I feel confident that in five years the company's total return would give me the same result at a 2.5% yield or better. I wanted to invest in a diversified portfolio, aiming for 20 stocks. I also want to avoid too much concentration in a single sector though I am tilting towards defensive stocks because I think the next five years may be tougher, economically, than people are expecting.
Many Dividend-Paying Favorites Have been Bid Up to Extreme Valuations
I have long followed the dividend investing authors here on Seeking Alpha and can certainly see the point
