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 growth 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:
- National Retail Properties (NNN) - Yield: 4.7% - Div. Growth: 1.5%
- Realty Income Corp. (O) - Yield: 5.3% - Div. Growth: 0.3%
- Health Care Property Investors, Inc. (HCP) - Yield: 5.8% - Div. Growth: 2.3%
Over time the above stocks have proven to be the jewels of my former high-yield investing days. Each of these companies has shown a commitment to growing their dividend.
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:
- Chevron Corporation (CVX) - Yield: 3.5% - Div. Growth: 9.1%
- The Coca-Cola Company (KO) - Yield: 3.2% - Div. Growth: 8.1%
- The Procter & Gamble Company (PG) - Yield: 3.1% - Div. Growth: 5.2%
- 3M Company (MMM) - Yield: 2.6% - Div. Growth: 6.6%
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 stand 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 spice to my income portfolio, but in very limited and controlled portions. Here are some high-yield securities that I hold that have performed well for me:
- ALPS Alerian MLP (AMLP) - Yield: 5.7%
- Eaton Vance Tax Advantaged Global Dividend Fund (ETO) - Yield: 7.4%
- AT&T, Inc. (T) - Yield: 5.7%
ETO is an ETF's that pays a steady monthly dividend, but cut its dividend back in 2008 during the financial crisis. AMLP is an ETF that has paid a dividend every quarter since November 2010, and has increased is dividend dividend every quarter since February 2011. In addition to its wireless business, T also participates in the declining landline business.
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 NNN, O, HCP, CVX, KO, PG, MMM, AMLP, ETO, T in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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