Bigger Isn’t Always Better: This Is The “Sweet Spot” For Dividend Yields…
As you may know, I’ve been Chief Investment Strategist over at High-Yield Investing for a long time. But the truth is, I’ve been a devoted income investor for even longer…
For those who don’t know me, I spent some time as a financial planner and wealth management advisor before I ever started writing about the market. I made the decision to write about stocks full-time in 2004. I’ve covered a lot of investment ground over the years, from commodities to micro-caps. But most of my time and energy has been spent pursuing quality dividend payers and interest-bearing securities.
The critical discovery I’ve made over the years is this…
By using the right combination of dividend stocks, you can create a retirement portfolio that maximizes income, maximizes growth, and minimizes risk.
This is exactly what High-Yield Investing is all about. Our portfolios represent a well-rounded, diversified approach to income investing that has served readers well since its inception.
It’s how our portfolio has been able to weather every major market storm, from the financial crisis through the Covid pandemic. All while still growing our income and scoring significant capital gains — like 385% from Conoco Phillips (NYSE: COP), which we’ve owned since March 2020.
Not bad, especially since our primary goal is income — not necessarily to beat the market.
So what’s our secret? I’ve found that the absolute best dividend payers typically fall into one of three categories. And the one I’m about to discuss today might be the most important one of all.
Allow me to explain…
The High-Yield Sweet Spot
We all want to maximize income. That’s what it’s all about. To do this, most investors typically look for the highest yields possible.
I doubt I need to tell you the primary benefit of high yields — the generous income payouts speak for themselves. And that’s particularly attractive for anyone looking for a large income stream in retirement.
But here’s the thing… you need to be selective. That sounds simplistic, but far too many investors “chase yields.” And it often ends up costing them big time.
When it comes to high-yield stocks, the biggest isn’t necessarily the best. You want to find something in what I call the “high-yield sweet spot.“
This segment of dividend-paying stocks consistently outperforms everything else over the long haul.
Professor Kenneth French, world-renowned for his financial research, painstakingly ranked the performance of all U.S. stocks from 1927 through 2013 according to yield. He discovered that a special group of high-yielders outperformed all others, returning an average of 14% per year.
This “sweet spot” isn’t made up of the absolute highest yielders — in this case, the top 20% of income payers. According to Dr. French’s findings, some of the best high-yielders pay above-average yields — but not so high that they can’t afford to keep paying them.
That’s the “sweet spot”… and that’s the group I focus on. What does that mean? Well, keep in mind that the latest version of the research I could find only goes through 2013. But we’re still looking at a large time frame. That said, the market looks a lot different today. What was considered “high yield” in the early 2000s or in the 1950s, for example, is not necessarily the same as what’s considered high yield today.
Remember, the Federal Reserve kept benchmark rates near historic lows for a long time. But when the Fed embarked on its battle to tame inflation by raising rates at an unprecedented pace, companies simply haven’t kept up. Right now, the average S&P 500 stock yields less than 2%. It’s pathetic.
So, technically, anything above could be considered a high yield. But for our purposes, you could start at 5% and go up from there. But the point is that you don’t want to go too high.
We own more than our fair share of high-yielders over at High-Yield Investing. But you won’t see a bunch of stocks that yield double-digits. That’s asking for trouble.
Sure, an event like the Covid crash may send the market lower, causing yields to shoot up. In fact, even today, we still own a couple of names that are right on the borderline that we consider turnaround plays. However, as Dr. French’s research shows, the stocks in this sweet spot tend to perform better over time. And that’s why you won’t see a lot of holdings that pay double-digit yields in our portfolio.
The big lesson here is that instead of looking for monster yields, you’re far better off looking for simply “high” yields, meaning higher than the S&P. In this environment, finding a solid company that pays 5% or 6% or so is where you need to look. They can still lead to thousands of dollars in income, and you’ll likely enjoy much higher total returns in the long run.
My High-Yield Investing readers know this all too well. They’ve been using our picks to earn income while maximizing growth and minimizing risk for years — and so could you. Depending on your situation, you could reinvest your dividends and watch your portfolio grow year after year — or simply “flip the switch” whenever you’re ready to live off the income.
I want all of our readers to have the opportunity to create a dividend-paying portfolio like this. That’s why we created a special report to help you get started. Go here to check it out now.