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“The deepest sin against the human mind is to believe things without evidence.”
-T.H. Huxley
Why are high-yield portfolios dismissed as inferior to their growth counterparts by so many investors?
The lure of high-returns seems to always trump the steady growth of blue-chip, high-dividend stocks in the mainstream media.
Could it be that investors are taught that increasing dividend yields mean lower portfolio returns? Or that dividend payments mean that management believes the company is finished growing?
Both couldn’t be further from the truth.
Look no further than the oft-mentioned “Dogs of the Dow” to disprove the ill-informed opinion towards high-yield investing.
The Dogs of the Dow is a simple, yet highly effective investment strategy that buys and holds equal dollar amounts of the top 10 high-dividend stocks in the Dow Jones Industrial Average (NYSE: DIA). Investors buy into the high-yielding dividend stocks at the beginning of each year. They then adjust holdings annually to include the top 10 high-dividend stocks in the Dow.
Simple right? But more important than the strategy’s simplicity are the overall returns.
Over the last 25 years, the Dogs of the Dow have compounded at an annual rate of 18.0%. And this outperforms the Dow and the majority of money managers by a healthy margin.
So, what does 18% compounded annually mean to investors?
A $10,000 Dogs of the Dow portfolio would be increased to over $625,000 over 25 years. Meanwhile the average index fund would have grown to around $330,000 over the same time frame.
But if the Dogs of the Dow strategy wasn’t enough to make you believe in high-yield portfolios, just look towards famous Wharton finance scholar Jeremy Siegel’s study on the subject.
The noted finance professor found that over the past 45 years, the highest yielding 20% of S&P 500 stocks “produced an annualized return of over 14.3% versus an annualized return of 11.2% for the S&P 500 index, which resulted in three times the wealth accumulation of the index.”
As you can from the evidence, investing in high-dividend stocks is one of the top investment strategies over the long-term.
Don’t let the misconceptions and market myths deter you from getting into the action.
Dividend investing isn’t a get-rich-quick strategy. It’s a great way to build wealth over the long term to secure a steady cash flow for your retirement years.
How to Boost Returns Further Without Taking on Any Additional Risk
I have recently taken the Dogs of the Dow approach and “super-sized” it using a safe and reliable income strategy known as covered calls.
Back in late April I purchased one of the Dogs of the Dow stalwarts – Intel (Nasdaq: INTC) – in the High Yield Trader portfolio. Four months later I have already surpassed the 4% dividend by selling calls against the stock. And I fully expect to triple the dividend over the next 8 months.
Just think what the returns on the Dogs of the Dow strategy would be if you added another 8-12% annually and compounded that return over the next 20 years.
These are the types of strategies income investors need to use. Simple, reliable and more importantly, historically proven to outperform the market over the long-term.
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