The Lazy Investor

The Lazy Investor

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September 30, 2015

Dividends plus diversification

We know you want dividends. And if you rely on those dividends to cover day-to-day expenses, you'd rather receive them every month.

The best income-generating portfolios have the same characteristics as other portfolios:

• Fundamentally strong stocks, most with solid Quadrix® scores.

• Diversification between sectors, so you're not too sensitive to weakness in any single slice of the market.

• A mix of large, midsize, and small stocks, another type of diversification.

Income investors know the selection of dividend-payers is better in some sectors than others, and fewer small stocks pay dividends. However, if you take the time to explore small-caps and sectors with few dividend-payers, you'll end up with a stronger, more weatherproof portfolio — without sacrificing the ability to collect dividends every month.

Stocks in some sectors are more likely to pay dividends than others. For example, 90% of financial stocks and 98% of utilities in the S&P 1500 Index pay a dividend, along with 79% of stocks in the consumer-staples, industrials, and materials sectors. In contrast, just 44% of tech stocks and 34% of health-care stocks pay out.

That disparity explains why health-care stocks in the S&P 1500 average yields of 0.6%, while industrials average 1.4%. Strip away the non-dividend-payers, and the sectors look more alike, with health care and industrials averaging yields of 1.7% and 1.8%, respectively. In the other eight sectors, dividend-paying stocks yield an average of at least 2.1%, suggesting it's worth your while to scour nontraditional sectors in search of income possibilities.

Even in sectors with a low percentage of dividend-payers, diligent investors can find a decent selection. For example, if 44% of the 241 technology stocks pay a dividend, that equates to 105 payers. Our buy lists contain five dividend-paying technology stocks.

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