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Going on the Offense with High-Yield Dividends

22 February 2013 in Trading Ideas

Dividend-oriented investing has a reputation as a rather sleepy strategy for risk-averse investors, who tend to limit their portfolios to companies that have demonstrated strategies to reward shareholders with steady income. The idea behind the new High-Yield Dividends motif is that it’s possible to “play offense” with dividends.

The companies in this motif have a composite annual dividend yield of 4.6%. And none have cut their dividend in at least a decade.

Although the motif includes a wider swath of companies than might appeal to a more conservative investor, it also avoids smaller, potentially more volatile stocks by ensuring that each company has a market capitalization of at least $1 billion.

One of the dangers of chasing high dividends is what’s called a “falling knife.” Since the dividend yield of a stock is simply the ratio of dividend payout to stock price, when a stock’s price decreases, the dividend yield rises. “Falling knives” are stocks that experience sharp drops in price, and as a result look attractive to dividend investors – but may not be as promising as they appear. To guard against this, the High-Yield Dividends motif screens out stocks that have underperformed the S&P 500 by more than 10% in the last 6 months.

Companies with solid bottom lines have always been in vogue. But dividend stocks have become increasingly popular in recent years, and not just because of the current low-yield environment. Investors have also realized the outsized role that dividends can play in successful portfolios because of compound growth. In fact, between 1930 and 2012, dividends have contributed 42% percent of the S&P 500’s total return.1

For investors interested in big dividends while managing risk, the High-Yield Dividends motif could be worth a look.

1http://www.businessinsider.com/stock-returns-price-dividend-contribution-2013-1

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