Wed. Sep. 23, 2009

High Yield, High Risk Dividend Stocks *

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 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:

  • Integrys Energy Group Inc. (TEG) – Yield: 7.62% – Div. Growth: 1.5%
  • National Retail Properties (NNN) – Yield: 6.75% – Div. Growth: 1.4%
  • Realty Income Corp. (O) – Yield: 6.33% – Div. Growth: 2.1%
  • Health Care Property Investors, Inc. (HCP) – Yield: 6.12% – Div. Growth: 1.1%

None of the above stocks are currently on my buy list, mainly due to their underlying fundamentals. I suspect over time they will work their way  out of my portfolio.

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:

  • Johnson & Johnson (JNJ) – Yield: 3.18% – Div. Growth: 7.5% – Analysis
  • The Coca-Cola Company (KO) – Yield: 3.05% – Div. Growth: 7.9% – Analysis
  • Abbott Laboratories (ABT) – Yield: 3.48% – Div. Growth: 8.4% – Analysis
  • Emerson Electric Co. (EMR) – Yield: 3.21% – Div. Growth: 6.4% – Analysis

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 have 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 flavor to my income portfolio, but in limited and controlled portions. Here are some high yield securities that I hold that have performed well for me:

  • Alpine Total Dynamic Dividend Fund (AOD) – Yield: 15.74%
  • Eaton Vance Tax Advantaged Global Dividend Fund (ETO) – Yield: 7.33%
  • CenturyLink Inc. (CTL) – Yield: 8.86%

AOD and ETO are ETF’s that pay a steady monthly dividend, but each has cut the dividend over the last 12 months. CTL’s dividend has been flat at $0.70/share for 5 straight quarters. 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 ABT, AOD, CTL, EMR, ETO, HCP, JNJ, KO, NNN, O, TEG. See a list of all my income holdings here.

(Photo: Gravity X9)

2 Responses to “High Yield, High Risk Dividend Stocks *”

  1. Hugh Snodgrass says:

    At age 63, I am a recent reader of your blog. I am in the process of dumping all my mutual funds and want to orient my portfolio toward dividend paying stocks for current income. I see the point of looking for those which have a track record of increasing dividends, but my time frame is obviously less than very long term. I realize that blatantly chasing high yields will disappoint if those dividends are eliminated. My question is this: When is the bird in hand (high yield payer) not better than two in the bush (lower yield growing dividend payers) ? Why shouldn’t I just take the money and run ? Keep up the good work. I will look forward to your reply. Thanks.

  2. Hugh: One of the problems with high yields is that sometimes it is a sign the company is having problems. This can sometimes lead to a lower dividend and a lower stock price. Your capital can quickly erode that way. When you look at a stock with a high yield you have to determine why the yield is so high and ask yourself if it can realistically stay that high. I have had a few high yield stocks work out, but many more that did not.

    Best Wishes,