How Higher-Yield Stocks Decrease Risk In Dividend Growth Portfolios

While dividend growth is unquestionably a core, conservative strategy that tends to focus itself on wide-moat, established companies, investors may need a huge amount of capital to enable predominating 2-4% current yields to cover expenses. And though a DG portfolio generating 5-8% income growth a year should be able to withstand normal inflationary forces in the 2-3% range, what happens if we were to enter a prolonged period of abnormal inflation such as we saw in the 70s?

Though counterintuitive, since most investors equate higher yield with generalized higher risk, selectively and judiciously adding higher-yielding stocks to DG-heavy portfolios seems to immediately alleviate some macro-risks of DG - notably, inflation and income shortfall. This should not be taken as a green light to invest exclusively in high-yield however, since a high-yield heavy portfolio poses unique risks of its own. It is nonetheless an indicator that targeted, limited use of elevated yield points and non-correlated assets could be of long-term benefit to investors entrenched with blue-chip stocks needing an income boost.

Source: Seeking Alpha

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