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: 4.3% - Div. Growth: 2.4%
- Realty Income Corp. (O) - Yield: 4.4% - Div. Growth: 4.9%
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:
- 3M Company (MMM) - Yield: 2.6% - Div. Growth: 7.3%
- Johnson & Johnson (JNJ) - Yield: 2.9% - Div. Growth: 6.7%
- PepsiCo, Inc. (PEP) - Yield: 3.0% - Div. Growth: 7.2%
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:
- Eaton Vance Tax Advantaged Global Dividend Fund (ETO) - Yield: 10.6%
- Omega Healthcare Investors Inc. (OHI) - Yield: 8.1% - Div. Growth: 6.3%
ETO is an ETF's that pays a steady monthly dividend, but cut its dividend back in 2008 during the financial crisis. OHI is a REIT that has a record of increasing its dividend every quarter.
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, MMM, JNJ, PEP in my Dividend Growth Stocks portfolio, and long ETO, OHI in my High-Yield Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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