Limiting Risk: A Little Exposure To High Yield Goes A Long Way

riskyOne thing I’ve definitely noticed when constructing my Freedom Fund is that a little exposure to stocks with high yield can have a major impact on my overall dividend income.

Now, it should be noted that I don’t consider current yield as the most important metric when deciding whether or not to buy a stock. Every investment I make in a business is done so because I truly believe in that business’s prospects, I understand how they make money, I think they’ll be more and more profitable over time, and I believe they’ll share those rising profits with me in the form of increasing dividends. But that being said, current income is something I do think about because every additional dollar I’m able to generate from my investments puts me one dollar closer to financial independence.

Comparing Positions

However, the great thing is that just a sprinkle of high yield on top of a high-quality cake with a great foundation can really improve one’s prospects for generating more additional current passive dividend income.

I’ll show you how that works with a couple of holdings in my personal portfolio

I currently own 140 shares of The Coca-Cola Company (KO) worth a total of $5,682.60 based on today’s price of $40.59.

Coca-Cola, in my opinion, is one of the best companies one can possibly invest in. They are a global beverage powerhouse with more than 500 nonalcoholic brands, 17 of them being billion-dollar brands. As such, I have a good portion of capital invested in the company.

Each share of Coca-Cola pays a quarterly $0.305 dividend, for a total of $1.22 per year. That means my 140 shares pays $170.80 per year in dividends. That amounts to about $14.23 per month.

It’s taken me a number of years to amass a position of this size in Coca-Cola. I’ve never made a lot of money in my life, but I’ve leveraged as much of my spare capital as possible over the last few years to build up investments in fantastic companies that pay rising dividends, which has in turn increased my passive income from $0 to more than $5,500 per year.

But what’s amazing is that a much smaller investment for me elsewhere in my portfolio produces almost the same exact dividend income.

I currently own 170 shares of American Realty Capital Properties Inc. (ARCP) worth a total of $2,255.90 based on today’s price of $13.27.

ARCP is a REIT that acquires freestanding commerical real estate and leases these buildings out to credit worthy tenants. I like the business, but I’m not quite as big a fan of ARCP as I am KO. ARCP has only been around a few years, and has grown tremendously over this time frame. Their history isn’t quite as rich as a beverage company that’s been around for more than a century, and so I have less of my hard-earned capital committed to this company.

But what’s fantastic is that this hasn’t hurt my dividend income at all, since ARCP has a yield of 7.54% right now compared to KO’s 3.01%.

And this is how that plays out: Each share of American Realty Capital Properties pays a monthly $0.08333 dividend, for a total of $1.00 per year. That means my 170 shares pays $170.00 per year in dividends. That amounts to about $14.17 per month.

So I have less than half of the capital committed to ARCP than I do to KO, yet the income is about the same due to the yield on ARCP being more than twice what an investor can get with shares on KO.

Spreading And Limiting Risk

So this allows me to spread my risk out appropriately in terms of how much capital I can have committed to a company while still keeping an overall attractive dividend income profile across the entire portfolio.

This can be thought of as weighting your positions in terms of the dividend income they produce rather than how much the investments are worth. I don’t weight my portfolio like this, but I can certainly see the merits of doing so because it allows you to see how your dividend income is spread out across the positions.

I plan to eventually own 50 or so positions across my entire portfolio because my Freedom Fund will eventually fund my entire lifestyle, paying for all of my expenses via the dividend income it generates. But owning 50 or so positions means that if one investment were to eliminate its dividend, I still have 49 or more other positions paying out dividends. Factor in even modest dividend raises from the other ~49 investments and my dividend income will likely not even miss a beat, or perhaps even increase.

Of course, how this works in reality compared to theory all really depends. It depends on which investment cut or eliminated its dividend, how much you had invested with that company, the yield on shares, how much you have invested with the other positions, what kind of raises you receive from your other investments, and how effective you’re able to reallocate the capital from the potential sale of an investment that cuts or eliminates it dividend.

But what this article is designed to show is that you don’t necessarily need as much invested in high-risk, high-yield investments to positively affect your overall dividend income to the same level as lower-risk, lower-yield investments that are deemed to be safe foundations of your portfolio.

As such, I construct my portfolio with this in mind. I purposely have more capital committed to companies like Johnson & Johnson (JNJ), PepsiCo, Inc. (PEP), and Chevron Corporation (CVX) than I do to companies like Omega Healthcare Investors Inc. (OHI) and AT&T Inc. (T).

Conclusion

Your positions do not need to be equally weighted in terms of value across the entire portfolio because not every company presents the same risk/reward relationship or income potential. A very small investment in a rather risky investment with a substantial dividend can positively impact your overall dividend income to the same level as much more capital committed to a high-quality company with a much lower yield. The reason you see this relationship in the market is because there is typically more demand for investments that perceived to be safer and higher in quality. As such, the yield is lower due to investors driving up the price.

I believe my primary responsibility as an investor is to reduce risk wherever possible, and limit the chances of capital loss. Every investment decision I make is with the thought of limiting downside, rather than maximizing upside. With that in mind, I have purposely invested most of my wealth in companies that I view to have the least amount of long-term risk. Meanwhile, I can invest relatively small amounts of capital in companies that appear to have more risk, but due to that risk perception being widespread, shares typically have higher yields and as such I can generate similar levels of dividend income while investing much less capital, and, therefore, limit the risk of losing significant portions of my capital.

Full Disclosure: Long KO, ARCP, JNJ, PEP, CVX, OHI, and T.

How about you? Do you have your positions weighted equally, or do you invest according to perceived risk to reduce downside while factoring in income? 

Thanks for reading.

Photo Credit: bplanet/FreeDigitalPhotos.net

Edit: Corrected ARCP’s dividend and schedule. 

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87 Comments

  1. Hey Mantra!

    I prefer to try to keep my portfolio fairly evenly weighted. However, in the real world of investing it doesn’t quite work out that way. Usually when I find a company that I’m excited about at a valuation I’m excited about I find myself loading up on it while it’s at that great price. So my weightings get out of whack a little that way. Once I near retirement though, I’ll try to keep my portfolio more in balance with a risk adjusted weighting.

  2. Hey Jason,

    Something is not adding up here:
    “Each share of American Realty Capital Properties pays a quarterly $0.8333 dividend, for a total of $1.00 per year.”

    The yield of 7.54% does work into the $170 figure, but .8333 x 4 is 3.3332 per year, that means 170 shares should be generating $566.64 each year. Maybe the quantity of shares is off?

  3. Oh, and I enjoyed the post overall! Just thought you may want to correct that. Looking at the shares, it looks like the quarterly yield is what probably needs to be fixed.

  4. Dan Mac,

    I hear you. That happens to me fairly often as well. I remember loading up on AFL a while back and the weighting got out of whack. Same happened with PM and JNJ. But I think the key is to try and even things out over the long haul. I don’t mind a temporary overallocation to one company if the valuation is attractive enough to warrant buying more than usual. That’s a good problem to have! 🙂

    Thanks for stopping by.

    Cheers!

  5. Kipp,

    Thanks for catching that! ARCP is a monthly payer. I was writing about KO and then went right into ARCP, and forgot to adjust the schedule. I corrected it.

    Appreciate it! 🙂

    Best regards.

  6. DM,

    Thank you for sharing!

    My portfolio strategy is bit similar to yours, but over weighed with Canadian stocks, especially with Canadian utilities stocks.

    I do have very few high-yield stocks, but again high quality companies are my large portion in my portfolio (like yours). I also have bond and international exposures via ETFs to minimize the down-turn risks.

    Best Regards,

  7. Since I’m still actively building out my portfolio and have a long way to go I don’t pay too much attention to portfolio or income weight at this time. As I get closer to FI then I’ll analyze where I’m at and redistribute funds if needed.

    Funny you had this post go up today since I’m finishing up one for tomorrow that looks at my own portfolio’s weighting.

  8. FJ,

    I can imagine if I were a Canadian citizen I’d be much more exposed to Canadian equities as well. And there are certainly some great companies up your way, mostly in finance, energy, and telecommunications.

    Great that you’re diversifying internationally there. That can certainly limit risk in and of itself.

    I could probably stand a little more exposure to yield myself as I have a large number of investments in low-yielding stocks like IBM, ITW, AFL, V, etc. But I like the mixture of current income and growth my portfolio currently has, and I have time to allow that growth to blossom. 🙂

    Thanks for sharing!

    Best regards.

  9. JC,

    Yeah, how seriously you take all of this really depends on how far along you are relative to where you want to be. And I certainly didn’t care as much when my portfolio was half its current size. I remember having a 10% weighting to PM at one point.

    However, while I’m nowhere near complete with the masterpiece, I also keep in mind that the portfolio as it stands today is larger than what a lot of older people enter retirement with. So I could basically stop investing today and still hit a traditional retirement age as a millionaire. So I guess these days I do kind of look at the whole picture, more or less. Of course, as long as I’m able to keep investing I will. And that will naturally change the portfolio over time.

    Thanks for the perspective! Look forward to reading your post. 🙂

    Best wishes.

  10. My investments buys are usually for about 10K in total. That seems to be the way my broker does it. Something I’ll need to ask him about why he does it that way.

  11. Jason,
    I have all of the stocks that you mentioned except OHI. Another higher risk, higher reward stock that I hold is SeaDrill (SDRL). You can make a lot of arguments against the stock, but the dividend is close to 11% and the company seems to be managed well. The projected growth in earnings is only 3% per year, but the PE is only 3.4. This one probably makes more sense for somebody that is close to retirement than a youngster like you that has 50 years to let Visa run. (Side note on Visa, their DGR for the last 5 years is 45.9%, and 40.4% for the last year showing that the growth has been very consistent. If the dividend grows 40% per year for the next 5 years, it will be over 5 times as much at that time. So, the current yield of 0.75% will become close to a 4% yield on cost by the middle of 2019. Keep putting money there when you get the chance and you could be very wealthy by the time you are my age.)
    Be blessed, and be a blessing!
    KeithX

  12. The yield on cost is how hard your investment money is working for you. So if you do not buy anymore KO or ARCP, eventually the yield on cost of your KO shares will surpass your ARCP yield on cost. This might take a lot of years but it will happen eventually.

  13. Debs,

    Hmm, that’s strange. Big lots were more common years ago before the advent of discount online brokerages, but investing $10k a pop isn’t necessary anymore. Of course, I don’t know what your broker is charging you for his services. I only pay $7 per transaction, which means I generally pay $7-$14 per month for my stock purchases.

    I would definitely find out what’s up with that, though. 🙂

    Cheers!

  14. KeithX,

    SDRL is interesting, as many drillers are. Not sure if that’s a good holding for me, as you mention, but I can see some attractive qualities. I’d be a bit concerned about the sustainability of that dividend, but I suppose even a modest cut is still giving you healthy income.

    I’m hoping V can keep up that kind of dividend growth for a while. We’ll see. I’ll be disappointed with anything less than 20% dividend growth over the next few years or so, though. It’s definitely a bet, so we’ll see. 🙂

    Thanks for the support!

    Best wishes.

  15. IP,

    That’s a good point there. I don’t personally follow YOC, but I suspect over a period of a couple decades or less that KO will eventually exceed ARCP on a YOC basis. Of course, cumulative dividends are another story. Tough to say, though. Really depends on how fast KO and ARCP are able to grow their respective dividends. I would think a global beverage company will be able to grow faster than a REIT based here in the US, but I could be wrong.

    I obviously hope both perform very well. 🙂

    Thanks for stopping by.

    Take care!

  16. I have 300 shares of ARCP. I love the dividend but I must admit, it makes me nervous. It’s less than 1 percent of my equity holdings. Well see how it goes.
    All best, DD

  17. If you track YOC (point in time in the future) then it probably makes sense to also compare the cumulative figure as well.

    Dividends in the future are somewhat riskier than dividends today (if you buy into the idea of opportunity cost). Even if you purchase KO with a current yield of 3%, once the YOC reaches 10% likely at least a decade from now, the cumulative dividends may still not surpass that of a higher yielding T with a current yield of 5.2% even though the future YOC may not be much higher (maybe 6-7%).

    I suppose as dividend investors we have a lot of things we need to stay on top of in order to manage the long term growth of the portfolio’s value as well as dividend earning power.

    The other issue with long-term plays is that they are… well… long term. The future is uncertain, and over long periods of time even industries which we (our investment companies) understand well can change in ways we didn’t predict long ago.

    Seems that whether it’s a dividend payer or a pure growth play, we are probably best served by eventually taking some gains off the table and reinvesting (or rebalancing) into something new.

    Even a great company today can get turned on its head in 15 years.

  18. hi guys, I also invest in 10K quantas (my term). I do this for 3 reasons:
    1. it allows me to quickly see which companies are net + and net – return
    2. it GREATLY reduces my $6 commission in percentage terms
    3. As an options seller, I like to keep it real. In other words, I try not to sell an amount of contracts greater than what I typically buy – 10K is a good amount but not over weight.

    I will note that my portfolio is > $150K. So, 10K per stock is about 15 stocks in my portfolio.

    My addendum is that I like to focus my investments. So, While I tend to trade in 10K “quantas” I consider a full position to be 30K. Therefore, I may have as few as 5 and as many as 15 stocks. with each buy about 10K in dollar terms.

    works for me.
    t

  19. Hi DM,

    You mentioned that your intent is to minimize capital loss. I can understand about wanting to invest in stable, quality companies who can reliably pay dividends, but the capital loss part confused me (admittedly, it doesn’t take much!).

    Did you mean that a stock experiencing a capital loss would likely stop paying dividends? Or is capital growth a part of your early retirement strategy as well as dividend income?

    I’m curious about ARCP – is it taxed as ordinary or qualified dividends?

    I suppose I mainly think of weighting stocks in different industries more so than the quantity of the dividend income they provide; although I do have limits to prevent one stock from paying too much to reduce risk as you mention.

    Best wishes!
    -DL

  20. DM,

    Nice post and I had a post on the same lines a while back. It talks about the fact that if 1 stock cuts or eliminates the dividend, the passive income doesn’t take much of a hit. The portfolio may not be equally weighted, but depending on the yield, the stocks could more or less provide the same amount of dividend income. I called it dividend diversification rather than portfolio diversification 🙂

    http://dividendgrowthjourney.wordpress.com/2014/06/07/dividend-risks/

    DGJ

  21. I see your point but am not a fan of high yielding stocks such as ARCP. I am not implying ARCP is not a solid business as I don’t know enough about the company but they have not been around long enough to build the track record I seek from my investments.

    I would much rather buy companies where I have a reasonable level of comfort they will be in business regardless of the economic headwinds they will undoubtedly face at some stage of their existence.

    I would much rather purchase a few thousand shares of CHD (avg cost sub $20) where the dividend was $0.03/share/quarter (taking into consideration a 2 for 1 split in 2011); the current dividend is $0.31/share/quarter. Another example is my purchase of a few thousand shares of ADP (avg cost sub $40) where the dividend was $0.155/share/quarter and the current dividend is $0.48/share/quarter. By owning ADP, I also received shares in Broadridge (BR) when ADP spun off that segment of their business in 2007. BR paid a dividend of $0.06/share/quarter in 2007 and now pays $0.21/share/quarter. I have several other examples (JNJ, UPS, HSY, MMM, BNS, RY, V to name a few) where I have been rewarded handsomely merely because I invested in companies with a good solid track record and where I felt comfortable they would be in business 15 years from now. I can assure you my investment success has had nothing to do with my superior stock picking capabilities!!

    Many of your readers are young and have time on their side. I encourage them to invest in solid companies and to let time be a friend. Wonderful things can happen over a 15 year span!

  22. I like to keep a mix of high yielders in my portfolio, and consider the following to be very secure companies-T,VZ, O, HCN, KMI, PPL, and SO. Interesting to see the telecoms up so much today on the REIT news.

    Jason- from your watch list article on GE, what are your thoughts on UTX? It is starting to look pretty attractive here, although the yield is on the lower end. I’m about maxed out on my GE holdings to add any more.

  23. Good points DM! It’s all about not losing money and the making money part will take care of itself. Keep up the great work.

    Cheers!

  24. Thanks for sharing your view. This is how I’m implementing our dividend portfolio as well. The way I see it is like building a hockey team. You need a solid goal keeper and good defence, those are the steady dividend growth stocks. Then you have your forwards, these are the middle of the line, 3-5% dividend yield slower growth stocks. Then you have your flashy superstars, these would be your higher yield lower growth stocks.

  25. DD,

    I hear you. I definitely wouldn’t place ARCP in the same class as, say, a JNJ, KO, or BAX. Which is exactly why I have much less capital committed to the investment. But the great thing is that even a small amount of capital invested in this REIT can still produce pretty substantial income. 🙂

    Thanks for stopping by!

    Best regards.

  26. Ravi,

    I agree. I think one of the most difficult aspects of active investing is following companies and making sure they’re not “getting turned on their head”.

    I’m going through that thought process with MCD right now. I’m nowhere near ready to sell yet because it’s a global juggernaut. But I think they might be a victim of complacency and their own past success. And I personally thing complacency is a huge risk factor for many large, dominant companies. It’s hard to keep that hunger alive when you’re a $200 billion company, but that hunger is necessary.

    Let’s hope we don’t have too many companies go upside down on us. 🙂

    Best wishes.

  27. tuliptown,

    Thanks for sharing!

    Sounds like a great strategy there. I’ve never personally invested that way because $10,000 took me half a year or more to come up with. So at that rate I wouldn’t have been investing very often, and would have missed out on the effects of compounding all along. Plus, I never desired to have such a concentrated portfolio.

    But if it works for you then that’s great! 🙂

    Cheers.

  28. Dividend Life,

    Perhaps I should have clarified there.

    I’m not investing for capital gains, but if a company I own cuts or eliminates a dividend the odds are very good that I’ll also see the share price crater. I’m trying to avoid situations like this by focusing on reducing risk when and where possible. It would be terrible to not only lose income, but also lose a significant chunk of capital to invest elsewhere.

    ARCP’s dividends are taxed as ordinary dividends, like all other REITs that I’m aware of.

    I hope that helps. 🙂

    Best regards.

  29. DGJ,

    Yeah, that’s a great way to look at it. I was kind of referencing that in the post. I don’t weight my portfolio like that, but I think it makes a lot of sense to do it that way. I personally don’t need or even necessarily want every position to produce the same amount of income, but I also don’t want the dividend weightings to be all over the place. I think once my portfolio is producing enough dividend income to live off of, my weightings will probably range by a few percentage points or so, with obviously more weighting toward companies that I view as having less risk. Of course, evenly weighting everything means you’re not making a specific bet on any specific company or companies, which might prove to be the better strategy.

    Thanks for sharing!

    Take care.

  30. Chuck,

    I hear what you’re saying. And I typically espouse the benefits of investing in stable, dominant companies that pay and raise dividends, and have long track records of doing so. However, one has to keep in mind that every business starts somewhere.

    There’s a few things to keep in mind. First, many of the companies I love to invest in – and you mention – are pricey right now. ADP trades at a P/E ratio of over 27. CHD is near 24. And V, which I bought recently, trades at a P/E ratio of over 24. So while there’s risk in investing in companies slightly less established, there’s also certainly risk by paying too much for a company, even one that’s high in quality. The earnings growth might not live up to what’s expected, which could cause a P/E ratio compression, share price destruction, and possibly a slower dividend growth rate.

    Second, you have to remember that there’s always a trade-off. There’s no free lunch. So for every company you invest in with a low yield you’re basically assuming that the growth will materialize over a long period of time. A company that pays a higher yield now starts returning some of your investment back to you right away in pretty big chunks. So you’ve got a little bird in the hand vs. bird in the bush going on there. Some will prefer more income now, some will prefer more growth in income. I always recommend to try and balance that to the best of your ability, while tilting more toward growth if you’re young and more toward yield if you’re older. It’s a delicate balance.

    One last thing to keep in mind is that even dominant companies can go by the wayside. That’s why it’s important to diversify in terms of industry, market cap, geography, yield, growth, etc. JNJ may seem indestructible right now. But so did General Motors, Sears, Kodak, Lehman Brothers, and Washington Mutual at one point or another.

    It’s of the utmost importance to focus on quality, but I think quality can change over time. And it’s important to recognize that and protect oneself. And I think it’s also important to recognize that newer companies can blossom into great businesses. Of course, there’s risk there. But so is potential reward. It’s all about balancing.

    Thanks for stopping by!

    Best wishes.

  31. presone,

    I think UTX is a fantastic company. I looked at it a while ago and regret not buying. The price seems pretty reasonable here as well. I don’t think you’d go wrong buying right now.

    Happy shopping. 🙂

    Take care.

  32. Tawcan,

    That’s a really great way to look at it. And as a big hockey fan, I can really appreciate it. 🙂

    I hope ARCP turns into a Pavel Datsyuk. But only time will tell!

    Best regards.

  33. As somebody mentioned above , I also hold very small position in SDRL and in many other stocks, but my biggest positions in Canadian banks (TD, RY, BNS, NA), Canadian telcos (BCE, RCI) , tobacco (PM and MO), COP, JNJ. ….
    P.S. imho BCE is favorite stock for Canadians 🙂 , also we like our banks , practically all of them (“big 6”) has P/E < 15, attractive yield and twice per year dividend increases (on average)

  34. A little high yield never hurt, even for a young investor! I thank my 8 month ago self all the time for starting out with ARCP. It’s been supercharging my dividend income monthly and speeds up the rate at which I can FRIP into less risky positions 🙂

  35. Since ARCP is an REIT, I think for tax purposes it doesn’t qualify as a Qualified Dividend right? So the income you make from that gets a 15% (or so) tax. How do the taxes work when you have a mix of REIT and Qualified Dividends in your portfolio?

  36. I have more portfolio set up in 3rds; 1/3rd low dividend rate, low payout ratio, high dividend increase; 1/3rd around 3% dividend with at least 5% dividend increase, sub 70% payout ratio, 1/3rd high dividend, lower dividend increase, sub 85% payout ratio. I don’t invest in REITS or MLPs because of all the tax b.s.

  37. Hi. Great topic!
    When I first started getting into dividend paying stocks in late 2011, I decided to work toward a goal of having 12 stocks paying me $1800 per year. I won’t get into why I chose those numbers unless you ask, but suffice it to say I was on a quest. As I looked around, I picked up safer stocks, medium risk stocks, and riskier stocks. I also picked up some higher yield bond items (like PCN) and my favourite REIT (SNH).

    When I began I was not sure of myself, or the market, so in my initial efforts I reduced my goal to 12 stocks returning $900 per year. I figured I would be able to get the second half of each investment later. So, initially I invested only enough cash into each particular stock so that it would give me $900 per year in dividends. This had the net effect of making all the stocks in the portfolio equally weighted in so far as the dividend they paid me ($900/yr), but not equally weighted in terms of the amount of capital outlay for each stock – higher return stocks I held required a lower amount of capital versus lower return stocks (this is the connection to your article of today).

    When I made it to 12 positions paying me $900 per year, I looked over my portfolio of dividend payers, and decided that I was enjoying this exercise. I was also reading more and more from dividend bloggers (like you). I figured that, instead of buying the second portion of each of my 12 stocks (to reach the initial goal of $1800/yr in divy), I would continue finding quality dividend paying stocks and continue to buy enough of each to pay me $900/yr. One day I would eventually get to 24 stocks paying me $900/yr, which is the same income result as my original goal of 12 stocks paying $1800.

    Today, I am up to 18 stocks paying me between $900 and $100 per year, so I am well on my way to my original goal. Thanks for this great blog site, I always learn something from it!

  38. I will add that I do not re-invest dividends, other than to invest in new holdings, and I am at the stage in my life where I am living off the divys more and more. Also, two of my super risky holdings from 2011/2012 stopped out – I was nervous with them, and I set stops so that I would not lose the capital I had originally invested. Both stops triggered, and I never looked back – reinvesting the capital in some newer (safer) holdings.

  39. gibor,

    I can’t blame you for loving the banks up that way. They’ve been solid performers for so long, and offer above-average yields. In fact, I notice a lot of popular Canadian equities offer pretty solid yields across the board, which is really nice. BCE is especially strong in that regard, much like our AT&T.

    Thanks for stopping by!

    Best wishes.

  40. Seraph,

    I’m with you. As I wrote in my “Stages” article not too long ago, starting off with some strong yield really gets a portfolio off the ground, as strong dividend income can be reinvested right away and start to move the dividend income needle. Reinvesting that strong dividend income into less risky plays then starts to spread the risk and diversify the portfolio.

    Keep up the great work!

    Cheers.

  41. Matthew,

    You’re correct. Dividends from REITs are taxed as ordinary dividends, and thus do not receive the preferential treatment that qualified dividends do.

    However, I plan to keep a small portion of my portfolio in REITs. I’m targeting somewhere around 5-7%. That’s for a number of reasons, but certainly taxes factor into that.

    Since I plan to keep a small portion of my portfolio in REITs, I expect my overall tax liability, once financially independent, to be quite small. Paying taxes on, say, $1,000 in ordinary dividends will be quite feasible.

    Best regards.

  42. Dave,

    That sounds like a pretty solid way to go. I’ve never specifically broken it down, but I’m betting mine isn’t neatly partitioned like that. But that gives you a nice mix of current income and growth in that income across the spectrum.

    I don’t invest in MLPs either, but choose to go after the general partners both to avoid tax issues, and for the higher growth. However, I do have some exposure to REITs. So far they haven’t given me any issues.

    Cheers!

  43. Dave,

    That’s fantastic that you’ve reached that level. I certainly hope to one day find myself in a similar situation where I have a good handful of stocks paying near $1,000/year in dividends. That will provide quite a comfortable lifestyle without having to worry about working.

    Keep it up!! And enjoy those dividends. You’ve obviously worked hard for them. 🙂

    Take care.

  44. I couldn’t have said it better.

    I think complacency is probably the biggest risk. It’s easy to be motivated when you’re the underdog (same goes for talking about an investor). It’s only natural to de-risk once you become successful. It’s my biggest concern when investing in large-cap dividend payers, since bad sh*t seems to happen all the time.

    I’ll readily admit that once I have amassed enough wealth, I’ll probably de-risk as well and would be happy with 5% avg returns with lower volatility than the 7-9% that I’m going for now.

  45. Hey Jason,

    I try to have about the same % in each position and select a few stocks where I’m taking a bigger stake. For example, I believe AAPL will drive my portfolio to the top. I now have 13% of my portfolio in AAPL where most of my positions are 8%-10% of my holdings.

    I don’t like high yield stocks thought. They look awesome right now (in a bullish market) but look at them starting as at Jan 1st 2007 and you’ll see how bad most of them do if you buy them at the top of a market (as we are almost right now).

    cheers,

    Mike

  46. Great, I currently own both Ko ARCP as part of a diversified portfolio. ARCP monthly div is great to re-invest. Whats your thoughts currently on PG! Looking to add positions.

    Thanks,

  47. Mike,

    I hear you on stocks with higher yields. I think it really depends more on valuation and business prospects than macroeconomics, though. Besides, if you buy a great business at a great price that’s paying you substantial dividend income you would only look forward to a major pullback as an opportunity to accumulate more shares. I don’t look at performance in terms of share appreciation/depreciation, but rather performance in the underlying business. Share prices simply tell me how much I have to pay for access to equity. Sometimes those prices are advantageous, and sometimes they’re not.

    Now, if a business with a high yield is that way because it’s on risky ground and the business falters when a economic crisis hits then that’s a different story. But such a thing didn’t happen for many of the stocks listed above. Although, ARCP wasn’t around, so it’s hard to say what they would have done. But their major peer in O didn’t cut dividends and kept right on humming. In fact, when these stocks dropped, their already high yield escalated to extremely attractive yield levels.

    Best wishes!

  48. j-harr,

    I love PG. Great business. However, I don’t think it’s a steal here with a P/E ratio above 21 with very little growth to speak of over the last few years. The yield is attractive, but the payout ratio is a bit high as well. I’m a shareholder and a fan, but I do hope they’re able to get growth in the business going again. I’m not particularly interested in adding right now until the P/E ratio compresses a bit, either through share depreciation or growth in underlying earnings.

    However, I don’t think one would go wrong buying PG here if they’re in it for the next 20 or 30 years. But I do think they have to make some changes, as Lafley has been keen to do lately.

    Best regards.

  49. Hey DM!

    Great post! I was wondering what are your thoughts on recent decline on KO stock? Are you considering adding to your existing position?

  50. Denver,

    I like Coca-Cola quite a bit. And the yield is above 3% yet again, which is historically a good time to buy. I already have a fairly large position in the company, so I’d like to see it come down a bit more before adding, but if I were just starting a position or had a smaller investment I think one would start getting interested here. It’s no steal, but it’s not overly expensive either.

    The valuation looks pretty similar to PG, which was a stock I was commenting on just earlier. Similar P/E ratios, similar yields, etc. However, KO has done much better over the last five years and I think they’re better positioned to remain that way for the near future. However, I also expect Lafley to continue making sweeping changes at PG…so that could make things pretty exciting again there.

    I hope that helps.

    Cheers!

  51. Very insightful post. It’s the old risk/reward comparison that is so important to be a successful investor. I haven’t pulled the trigger on any dividend stocks yet as I’m still getting the lay of the land, but it would seem KO is a great position to start with. Thanks for the great post yet again.

  52. I try to be fairly equally weighted by sector rather than by individual stock. I don’t mind adding some risk as long as I have it balanced out with other good companies in that sector. For example, in the energy sector, I own COP, XOM, and NTI which is a small cap refinery and operator of gas stations. NTI is an MLP that is a hold-over from before I switched my portfolio to being dividend focused. I have kept it because it is a way for me to play the Bakken Shale oil boom which is ongoing right in my back yard. Currently it is yielding over 12%. It has a short history and there is no reason to assume that the dividend will grow or even be maintained, but I have chosen to hold it as a speculative play. It is actully down about 1% since I purchased a year and half ago, but the dividends I have received from it actually put it in the black for me.

    Just out of curiosity, why do you consider T a “riskier” stock? With 29 consecutive years of dividend increases and one of the largest telecoms in the world, I have considered it a blue-chip stock. It is one of the largest holdings in my portfolio.

  53. DM,

    Another fantastic and insightful blog post. It actually motivated me to take action with my portfolio. I had been on the fence with KKR for the longest time. Like ARCP, they’re high-yield (currently 7.6%), but risky. I prefer solid companies and solid dividends. But reading this helped me realize that a little high risk in a portfolio isn’t a bad thing, especially if you’re going to enjoy a nice dividend. Whatever happens with KKR, it’s not going to make or break my portfolio, not for the amount I’m investing in it. So why not take a chance?

  54. Another nice article DM….personally I like a little high yield, a little medium yield… a nice bit of diversification on the yield.My portfolio has the solid earners like KO.JNJ,PG and a few more aristocrats. But I also have EVEP,ARLP and a couple REITS. Your portfolio, whatever works for you! Just as long as your aware of the tax implifications that come along with the MLPS ant the REITS!

  55. Thanks, guys. Originally the investment company I have would not invest my money in individual stocks because I didn’t have a large enough portfolio. So I was in mutual funds etc… this was before the days of discount brokerages. Then once our portfolio got large enough, they agreed to handle individual stock investments. I mean these guys are trying to beat the market. Index funds are not really their style. I’m not really sure why he chooses to do in approx 10K chunks and I’ll have to ask him but it might have to do with managing the diversification. He’s got about 20 – 30 positions for each of my husband and me for about 350K for me and 200K for him. I suppose it’s easier to ensure the diversification across industries and markets etc. is easier if you don’t have too many stocks. I mean, if we had 5K in each stock and therefore 50+ stocks in total, how do you ensure the right level of diversification? You would have to be continually adding up like stocks and industries etc. and rebalancing the portfolio. I mean in some ways you think more stocks = more diversification but if they are just more stocks in the same industries, then you are not really diversified are you? But are spreading risk across companies, but if a market segment takes a hit, all the companies move the same way so that doesn’t help you. Dunno… still learning so I appreciate the openness and discussion. Helps me to understand more the considerations I need to think of when I start managing myself. How am I going to know what industry each stock belongs to, for instance? More questions … I know.

  56. Hi yield is like a spicy ingredient in a dish: it’s a strong ingredient that’s best used in moderation. Thanks for the nice article!

  57. Syed,

    Thanks for stopping by.

    I agree KO would be a great stock to get your feet wet with. It’s about as blue as a blue chip comes, and the valuation isn’t completely out of line right now. Best of luck starting down that path. 🙂

    Take care.

  58. BCS,

    Nothing wrong with the occasional spec play as long as you’re aware it’s speculation and okay with the downside. It’s simply about managing risk and reward appropriately. I hope it works out for you!

    I think T has unique risks. Mainly, it’s risk of lack of growth. The dividend growth has barely kept up with inflation over the last few years, and at some point will fall behind if the annual $0.01 raises continue. So the risk there is in risk of loss of purchasing power, which is real. However, how much of a risk that is depends on your time horizon. It’s a bigger risk at 32 then it is at 62. That’s not to say I likely won’t add to T at some point, but I’ll do so knowing that the risk of low income growth is there.

    Cheers!

  59. Phil,

    If you can withstand that position going to $0, and the rewards seem to outweigh the risk then there’s nothing wrong with that. Especially so if you already have a substantial portfolio that’s on solid ground. I obviously don’t get too crazy with the high-yield risky stocks, as you can see in my portfolio. However, the great thing is that a little exposure goes a long way. So it doesn’t take much. 🙂

    Thanks for adding that!

    Best regards.

  60. maurice,

    Thanks! Glad you enjoyed it.

    I’m with you. The bulk of my portfolio is in companies like JNJ, KO, PEP, PM, KMI, CVX, COP, etc. However, there’s a few investments here and there that provide a little extra potential reward for higher risk profiles, like TIS, ARCP, and DLR.

    A little goes a long way, which is why my exposure to what I deem riskier investments is pretty light.

    Take care.

  61. Debs,

    Well, you’re pretty far along there. $10k lots in a portfolio worth hundreds of thousands of dollars is no big deal. However, for those working with substantially less assets I think it would be more beneficial to invest more often, which is what I’ve done. If I were waiting around for my savings to exceed $10k to save on what is already minor commission fees I would have been investing every 3-5 months all along, and I would have missed out on great opportunities. Plus, my portfolio would have 1/3 the positions it currently has.

    As far as diversification goes, 20-30 investments spread out across almost all sectors is probably all you need. I’ve explained before why I want 50 or so positions, but it’s not necessary to have that many to be diversified.

    Great job on building up such sizable assets! 🙂

    Best wishes.

  62. Broken,

    I actually looked at Cracker Barrel not long ago for Daily Trade Alert:

    http://dailytradealert.com/2014/07/11/these-11-dividend-growth-stocks-go-ex-dividend-next-week-4/

    I viewed the company quite favorably, even with low revenue growth over the last decade. The balance sheet was a weakness, but other than that there wasn’t much to dislike. However, I view the restaurant industry as extremely competitive, and it seems to be getting more competitive every day. I actually don’t think I’d want more than one restaurant in my portfolio, and that slot is currently occupied by MCD. If I didn’t own MCD I might take a swing at CBRL. But I don’t think the dividend growth can continue at the previous pace. But even with 6-10% growth in the dividend you should see pretty appealing returns if they’re able to keep that up for the long haul.

    Best regards!

  63. I generally don’t buy a company, unless their yield is above the S&P average. I feel cheated if I don’t at least earn a 3% annual yield. I will start with a small amount to invest and watch. I add to the portfolio, whenever, the valuations and technical tools support it. I use the Bollinger Bands to help me figure out which positions to increase on any given month. Once I have made a substantial gain (60% to 100%) through dividends and capital appreciation combined, I may sell part of the portfolio to get my original money back, but let the rest of the investment ride with reinvesting dividends (until retirement). Then, I reinvest my original money in a new investment. This helps minimize the risk and keeps my portfolio in check. I also make sure that no position is larger then 2-7% of my dividend portfolio. My ultimate goal is to use my dividends to support my retirement.

  64. Dear Blog readers and especially the young ones,

    This is a special blog.
    This guy built a portfolio from $ 5000 to $ 100,000 in just three years.
    Today, I guess it is approximately $ 170,000.

    He is a passionate blogger.

    It is for free, read it as much as you can

    Dear readers and especially the young readers here is the secret: “” Steady Compounding “”

    There is nothing in the world like compound interest.
    If you put $ 2000 a year into an Stock account when you are nineteen and
    continuing just for eight years, until you are twenty-seven, when you retire at sixty-five THE
    $ 16.000 WILL HAVE GROWN TO OVER A MILLION DOLLARS !!!!!
    This assumes you keep the money working at 10% percent per annun compounded.

    But which stocks should I invest ?.
    Read first the dividend blogs like this one.
    Open for example the site: the site: http://www.longrundata.com/

    And enter the stock symbols I provide you to start with.
    And see what your annualized total return could have been in the past.

    Symbol:
    Altria Group Inc. (MO)
    Philip Morris International, Inc. (PM)
    Chevron Corporation (CVX)
    McDonald’s Corp. (MCD)
    Brookfield Infrastructure Partners L.P. (BIP) my tip !!

    Never follow a tip do always do a depth analysis. !!!!

    Happy dividend investing,
    Met vriendelijke groet,

    George T, Jr.
    Arnhem

    The Netherlands/Nederland

  65. The keyword with this topic comes out to ‘balance,’ and how well you can sleep at night. As you mentioned you are more comfortable with KO than ARCP but have created your own personal balance that allows you to be comfortable and spread your risk around. I fear that many dividend bloggers are current yield seekers and don’t realize the dangers of simply living in the now regarding dividends. The whole concept of dividend investing is to build a portfolio over time with solid stable companies and let time, compounding and dividend growth snowball over decades. I think too often people chase the ‘now’ factor instead of the benefits ‘later.’ Thanks for sharing.

  66. paperboy,

    That’s an interesting strategy there. I say go with whatever works for you. I don’t personally like to sell equity in a company like that, but if you feel better about it then I say go with that.

    I also like to get over 3% yield when I can, but I’m not super strict with that. There are many high-quality companies that yield less than that, and some of my best companies have actually had yields less than 3% at the time of acquisition. (HRS, ITW, AFL, PSX).

    Cheers!

  67. George T,

    Thanks for stopping by and commenting. Appreciate the support and kind words.

    Couldn’t agree more in regards to the power of long-term compounding. The earlier you can get compounding on your side, the better. 🙂

    Hope all is well there in The Netherlands!

    Best regards.

  68. DivHut,

    I also find it unfortunate when I see young people chase after yield alone. I remember getting a lot of flak for not buying AGNC and NLY back when I first started because of the monster yields. Of course, both have gone nowhere (or down) in terms of share price, and the dividends have been cut at both firms over the last five years.

    The key is quality. Focusing on yield only will surely lead you to trouble. Of course, sometimes it works out. But it’s a gamble. I was actually just conversing with a reader via email about WIN. That’s a high-yield stock that’s actually turned out quite well, but I know I couldn’t sleep at night gambling with a bunch of stocks like that. But if you have a substantial portfolio that’s built around fantastic companies, a little exposure to risk and higher yield probably won’t harm you. But, as you state, it’s all about balance.

    Take care!

  69. Jason – I’ve probably read too many of the Rich Dad books, which stress that investors get their seed money back as soon as possible, while retaining the initial investment. From a technical perspective, this leads to the idea of an “infinite return” since you own the asset but don’t have any of your own money invested in it. Currently, I have approximately 13.5% of my stocks in this category. If I can raise it over tto 25-50% overtime, while still investing regularly, I would feel pretty good about this. However, I try not to sell to many stocks because of the tax implifications. However, I am also shooting for over $1200 in dividends this year in my non-retirement portfolio, which I think was your goal a few years ago. So far so good!

    Thanks for taking the time to write the blog, your posts are very informative and thought provoking.

  70. It’s all about what you’re comfortable with. Stocks are already quite risky. High yield stocks more so. Diversifying with some quality high-yielding companies is great. Some people want less risk and buy bonds. Some people only have CDs or savings accounts. Others have domestic index funds, foreign index funds, or a mix.

  71. WE,

    Definitely. It’s all about balance and finding what you’re comfortable with.

    However, I would argue that bonds, CDs, and savings accounts are some of the riskiest asset classes out there for any long-term wealth storage. Good for a little short-term cash parking, though.

    Best regards!

  72. I also try to keep my dividend portion fairly balanced, but I try to balance it per income and not per value. So basically I try to balance the holdings so each brings let’s say 3% income (just an example) and weight holdings that way. The reason is that if one stock stops paying dividends I only lose 3% income of the entire portfolio and not more.

  73. As DM said, they are taxed as ordinary dividends, that’s why if possible you should hold REITs in a Roth IRA if you can. I’ve started putting my REITs like O, OHI and ARCP in a Roth IRA so I don’t have to pay any taxes at all. My Roth isn’t that big yet and due to the annual contribution limits won’t grow that big very fast, so I am thinking to keep the Roth dedicated to the real estate sector of my portfolio.

    There are advantages and drawbacks to putting your money in a Roth IRA, especially if you are aiming to retire super early, but even then I personally think the advantages still outweigh the ‘early access to your money’ requirements.

  74. I don’t see dividend stocks being any more risky than bonds. I suppose if a company had to dividends would be cut before they would default with bonds. But the way I look at it is if the company is solid enough to weather the great recession and keep increasing dividends than the risk is pretty limited. I am tending to weight my portfolio for fast growth right now as I am having trouble with the capital side of things. I am doing my best to save but it is not easy on one income. I think as it grows though I will start to balance it out and make my riskier stocks positions around 20%.

  75. DFG,

    I actually see dividend stocks much less risky than bonds, which is a major reason I have a 0% allocation to bonds right now. That may change in the future as rates allow, but for now I’m very comfortable with my near 100% allocation to equities.

    The major risk with bonds isn’t so much loss of income, but loss of purchasing power. And that is effectively loss of income as time passes and your current income becomes less and less valuable. I’d rather stick to high-quality businesses that have pricing power and can pass along regular raises to me. 🙂

    Best wishes!

  76. I tried the even distribution for my core holdings and alloted “RISK” money for higher dividends to tweek the overall income. While it has worked well for me because I use a 7-10% downside stop on the riskier one I find that NTI can be one to give you a stmoach ache. I currently have a few hundred shares and will probably pick up another 100 now that it is off 10%> It isn’t a huge investment but that $1.19 dividend helps. I will probably stick it out a while to see if the doomsday merchants are right.

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