Every income investor needs a healthy dose of dividend stocks. Why bother? Why not just concentrate on bonds or CDs or whatever?
Because all the different income-producing assets available to income investors have their own characteristics that make them suited to one market and not another. You need all of these types of assets if you’re going to generate maximum income with minimum risk as the market twists and turns.
For example: bonds are great when interest rates are falling. Buy early in that kind of market and you can just sit back and collect that initial high yield as well as the capital gains that are generated as the bonds appreciate in price with each drop in interest rates.
CDs, on the other hand, are a great way to lock in a yield with almost absolute safety when you’d like to avoid the risk of having to reinvest in an uncertain market or when interest rates are crashing.
Dividend stocks have one very special characteristic that sets them apart from bonds and CDs: companies raise dividends over time. Some companies raise them significantly from one quarter or year to the next. That makes a dividend-paying stock one of the best sources of income when interest rates start to rise.
Bonds will get killed in that environment because bond prices will fall so that yields on existing bonds keep pace with rising interest rates.
But because interest rates usually go up during periods when the economy is cooking, there’s a very good chance that the company you own will be seeing rising profits. And that it will raise its dividend payout to share some of that with shareholders.
With a dividend stock you’ve got a chance that the yield you’re collecting will keep up with rising market interest rates.
I re-launched this Dividend Income Portfolio in October 2009 because I think there’s a good chance that investors will be facing exactly that kind of rising interest rate environment sometime in 2011. If that happens, when that happens, you’ll be glad you own stocks that pay high and rising dividend yields. Even after a 60% or so rally from the March 9, 2009, lows, many dividend stocks are still cheap. They won’t be if you wait until interest rates start to rise before buying them.
The goal here is to beat the yield from a 10-year Treasury bill and to control downside price risk so that the total return is well ahead of that benchmark.
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