High-dividend-yield stocks form a part of my overall portfolio. True, these stocks can often be quite risky, with the dividends potentially less sustainable than others. But there’s something to be said about assembling such stocks into a portfolio with the aim of generating a high yield overall. So that’s what I’m looking at today.
On the hunt for income
To begin with, I don’t want to just pick one stock with a yield above 10% and stop there. The main reason is that I don’t feel this diversifies my risk enough. If I put all my eggs in one basket and then the company falls on hard times, 100% of my income is at risk of being cut.
Given that there are many stocks in the FTSE 100 and FTSE 250 that currently have double-digit yields, I can add in more shares without compromising my dividend level. So not only can I retain a high yield, but I can reduce my risk at the same time.
From the FTSE 100 I’ll bring together Rio Tinto (14.05% yield) and Persimmon (13.23%). In the FTSE 250, I’d buy Hammerson (19.58%), Synthomer (13.11%), Diversified Energy Company (12.4%) and Jupiter Fund Management (12.21%).
If I invest the same amount in each stock then I’ll get an average dividend yield of 14.09%.
Risks and rewards
There are ups and downs with this strategy. Let me start with the positives. If the dividends remain the same for all the businesses, the income I’ll receive will be exceptionally high. It will allow me to make a positive return even when taking into account the current rate of inflation (9.1%). It’s also considerably higher than any kind of cash deposit on offer.
However, this concept could be too good to be true. My main concern is the risk level. For instance, I’ll have exposure to property via Hammerson and Persimmon. I’m optimistic about the outlook for the sector, but I acknowledge that some are concerned about it.
Further, I’m exposed to volatile commodity prices from buying shares in Rio Tinto. As for Diversified Energy Company, I don’t need to remind myself about the risk of investing in an oil and gas exploration and production firm!
In reality, it’s the unstable share prices that often provide the high yield in the first place. For example, the Jupiter Fund Management share price is down 50% in the past year. The lower share price pushes up the dividend yield.
Managing my risk with high-dividend-yield stocks
I’m happy to take some exposure to this area. I think blending a mix of stocks is the smart play. However, I’d still only want to invest a small amount of money. It’s not that this portfolio is exactly too good to be true, but I think the probability of earning this level of income for a long period of time isn’t that high.