The High-Yield ‘Sweet Spot’ That Leads To The Best Returns

As many of you know, I’ve been Chief Investment Strategist of StreetAuthority’s premium newsletter, Daily Paycheck, for over a year. But the truth is, I’ve been a devoted income investor for years.

For those who don’t know me, I spent some time as a financial planner and wealth management advisor before coming to StreetAuthority full time in 2004. I’ve covered a lot of investment ground here over the past 14 years, from commodities to micro-caps. But most of my time and energy have been spent in the pursuit of quality dividend payers and interest-bearing securities.

The critical discovery I’ve made over the years is that by using the right combination of dividend stocks, you can you create a retirement portfolio that maximizes income, maximizes growth and minimizes risk.

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This is exactly what the Daily Paycheck strategy is all about. In fact, our three distinct portfolios — High-Yield Opportunities, Fast Dividend Growers and Steady Income Generators — represent a well-rounded, diversified approach to income investing that has served readers well since its inception nearly nine years ago.

It’s how our portfolio has been able to collect nearly $150,000 in dividends since 2009, while growing from an initial value of $200,000 to over $400,000 during that time.

Our strategy uses three types of dividend stocks. But for the purposes of today’s essay, I want to focus on one type — the one we use to maximize income. Of course, I’m talking about high-yield dividend stocks.

I doubt I need to tell you the primary benefit of this elite category. High-yielding securities are defined by their generous income payouts. This makes them particularly attractive for anyone looking for a large income stream in retirement.

But you need to be selective. When it comes to high yielders, the biggest isn’t necessarily the best. Instead, you want to find something in what I call the “high-yield sweet spot,” a segment of dividend-paying stocks that consistently performs well 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 there’s a special group of high-yielders that outperformed all others, returning an average of 14% per year.

high-yield dividend stocks

This “sweet spot” isn’t made up of the absolute highest yielders — for instance, those with 18% yields and up. According to Dr. French’s findings, some of the best high-yielders are those that 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. So in the high-yield section of my Daily Paycheck portfolio, the yields start at 7% and go up from there. The average high-yield holding pays about 8%, but the portfolio also includes a couple of double-digit gems.

Let me show you an example from my portfolio that illustrates what I look for in a high-yielder. Gabelli Multimedia Trust (NYSE: GGT) is a closed-end fund that has traded on the NYSE under the ticker symbol GGT since 1994. The fund holds an unusual mix of very dependable cash cows and aggressive growth stocks — from rock-solid global telecommunications firms to fast-growing internet companies.

We first bought shares in August 2010. Our total return, including thousands in dividends we’ve received over this time, is 182%.

The fund has a mouth-watering yield of 10.9%. So if you invested $10,000 in it tomorrow, you could immediately start collecting about $1,090 annually.

But Gabelli isn’t the only one like this. There are plenty more. In fact, I own another fund that pays 8.4% — and has delivered a total of 180.5%… while another holding pays 6.2% and has returned 144.6%. In fairness to my paid subscribers, I can’t reveal the names of all these high-yielder holdings. But all of these holdings are right in the “high-yield sweet spot,” and pay an average yield that’s more than far greater than the S&P 500. They have paid my Daily Paycheck subscribers thousands of dollars over the last few years — and they could do the same for you.

But beyond these high-yielders, I have two other groups of dividend stocks specifically designed to maximize growth and minimize risk. By reinvesting our dividends in each one of these holdings, we’ve been able to create an income portfolio that’sdoubled in size since inception. Our readers can do the same — and watch the size of their portfolio grow year after year — or simply “flip the switch” whenever they’re ready to live off the income for retirement. 

I want every StreetAuthority reader 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. To check it out, simply follow this link.