Reaching for Yield Is Not a Good Strategy

I often get asked why some of the holdings in my portfolio have such low dividend yields. If I am such a proponent of dividend investing, why then am I not sporting a 5 to 6% average dividend yield in my portfolio.

Rather than struggle to frame a response in my own words, I thought I would post an excerpt from a recent article I read over at Forbes.com:

The trick, however, is not to fixate upon yield, as sometimes an above-market yield is a sign of unsustainable cyclical earnings. Watch, too, for a high payout ratio–dividend divided by net profit–as another sign that a dividend may be vulnerable. A stable and growing, if smaller, dividend offers greater security of long-term income.

Example: Health care behemoth Johnson & Johnson (nyse: JNJ – news – people ), which has increased its dividend in each of the last 44 years. Johnson & Johnson’s dividend has grown at a 15% clip per annum over the past 15 years. So while J&J’s current yield stands at 2.3%, if the company keeps increasing its dividend at its historical pace, investors will see their annual income double in five years and quadruple in 10.

The power is not in a high dividend yield, but rather a growing one. Pretty simple concept really.

• Dividend Stock Wednesday: Johnson & Johnson (JNJ-N)
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• The Dividend Guy Investment Process Part 5: Initial Dividend Stock Screening
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• Chasing Highest Yield Dividend Stocks Is Chasing Your Own Loss