The 8% Dividend Sleeve

Seeking AlphaDividend StrategyThe 8% Dividend SleeveJun. 23, 2020 7:56 PM ET|| Includes: CTL, IRM, MO, OKE, PJH, PRH, PRS, PRU, SPG, SPG.PJ, SPY, T, T.PA, TBB, TBC, VTR, WFC, WFC.PL, WFC.PN, WFC.PO, WFC.PP, WFC.PQ, WFC.PR, WFC.PT, WFC.PV, WFC.PW, WFC.PX, WFC.PY, WFCNP, WMB, XOMby: Dumb WealthDumb Wealth Dividend investing, macro, portfolio strategy, goldDumb Wealth.cls-1{fill:#024999;}SummaryThere are currently a number of dividend stocks yielding 7, 8, 9%+ that have recently been attracting a lot of investor attention.
There are strong arguments for and against investing in many of these individual companies. However, a more prudent approach would be to diversify.
Below, I provide an example of how an investor can create a high yield dividend sleeve for a portfolio while mitigating the risk of holding a single stock.
I've recently read a lot of articles examining the merits of individual stocks like Exxon Mobil (XOM), Altria (MO) and Iron Mountain (IRM) partly because of their massive dividend yields. With yields like 7.22%, 8.18%, and 8.88%, respectively, I can certainly understand the initial attraction.
At those yields, many investors look at these stocks like high yield bonds - the coupons (dividends) alone would earn a respectable total return (assuming the price remained constant). Speaking of total returns, however, none of these yields - nor the share prices - are guaranteed to remain intact.
A high dividend yield on any stock invariably comes with the inherent risk that the dividend will be cut. The vigor of debate over these kinds of stocks is typically intense. Some argue these stocks are being unduly punished for previous mistakes (e.g. Altria's purchase of Juul) but have the free cash flow to cover their dividend. Others argue these stocks are in a dead-end industry (e.g. cigarettes) and will continue to see cash flows eroded.
Recognizing there are solid arguments for and against each of these companies, many investors are torn. Do they... Read more