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Friday, May 17, 2013 - 10:00
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Friday, May 17, 2013 - 10:00

Build Your High-Yield Portfolio With 1 Easy Investment

Friday, May 17, 2013 - 10:00am

As any trader knows, investing in the stock market can be tricky.

Many investors study past price charts and imagine how much money could have been made had they only bought here and sold there. This type of investing based solely on hindsight and past price movements can be dangerous to your portfolio.

This is because money is not made by looking at a chart of what once was. It's made after you enter the investment, and the entry point is always on the far-right edge of the where the chart ends.

We would all be stock market multimillionaires if success could be found by looking at what has happened. The truth is, no one knows for sure what is going to happen after you buy or sell a particular stock.

This is why success in the stock market is built upon increasing the odds of profiting by utilizing time-tested investment strategies, diversification and a long-term horizon.

Believe it or not, dividends make up the majority of the stock market gains over the past several decades. Investing in a portfolio of high-yielding, dividend-producing stocks is a proven wealth-building strategy.

But not just any high-yielding stock should be in your portfolio. Sometimes high yields are a signal that something is wrong with the company or are simply dividend traps to draw in more investors prior to the dividend being slashed.

Carla Pasternak, the brains behind StreetAuthority's High-Yield Investing newsletter, teaches that investors should look for companies that have steadily increased their dividends over time. In addition, companies that are yielding 5% to 7% make up the majority of outperforming stocks.

This is not to say that the ultra-high-dividend payers that yield 10% and more don't have a place in your portfolio -- it's just that they are the most risky. Companies in the 5% to 7% yield range, combined with a 10% annual dividend growth rate, are the crème de la crème of the high-yield universe.

You could painstakingly search for these perfect high-yielding stocks to build your dividend portfolio -- but there is an easier way.

The stock I've come across is the SPDR S&P Dividend ETF (NYSE: SDY).

This exchange-traded fund (ETF) does all the work for you when it comes to building a diversified portfolio of high-yielding names. It is designed to track and mirror the returns of the S&P High-Yield Dividend Aristocrat Index. This index comprises only the 50 highest-yielding companies in the S&P 1500 index that have steadily increased their quarterly distribution each of the last 25 years.

As you can imagine, SDY has handily beat the major indexes in recent years. In the past five years, SDY has beaten the Dow Jones industrial average by 23%, the Russell 3000 by 21%, and the S&P 500 by 11%. It is up by more than 14% this year and boasts nearly $12 billion in assets.

Here are the top 10 holdings of the High-Yield Dividend Aristocrats Index.

Risks to Consider: The stock market has been in a super-bull phase this year. Buying into this ETF is a vote of confidence that the bull market will continue. It appears that the market will continue higher until the Federal Reserve begins to tighten its policies. No one knows for sure when this will occur. Be certain to always use stops and position size properly when investing.

Action to Take --> Buying into the strong uptrend right now makes good sense. My 12-month target on the shares of SDY is $90.

P.S. -- The Dividend Aristocrats are perfect for investors who are near or at retirement age and are seeking a second income. We call these "Retirement Savings Stocks"... they can hand you a "second income" as much as 14 times what you can get with CDs, seven times higher than bonds, and as much as three times higher than brand-name Dow stocks. To learn more about them, go here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.