Build a High-Yield Portfolio

Buy 10 to 15 high-yielding large-cap stocks today and hold them -- forever.

Yes, you read that right
That's the basic philosophy of the High-Yield Portfolio (HYP) strategy put forth by our friends at Motley Fool U.K. back in 2000.

At first glance, the whole idea sounds a bit crazy. I mean, buying stocks with the intention of never selling them comes off as, well, perhaps a bit naive.

After a closer look, though, the HYP strategy offers some distinct advantages.

But first, let's take that closer look
So how does the HYP strategy choose its 10 to 15 stocks? It chooses only:

  • Large-cap stocks,
  • With a history of increasing dividends,
  • Relatively low debt levels, and
  • Sufficient dividend coverage,
  • That hail from diverse industries.

The original UK HYP, for example, picked 15 stocks from the FTSE 100 index, including Rio Tinto and Scottish & Newcastle.

The only permissible reasons to sell or remove a stock from the HYP portfolio are (1) the dividend is halted or cut, or (2) the company is acquired.

All about growth
Like other dividend-focused investing, the HYP strategy relies on the power of dividends to strengthen overall returns. Dividends, after all, have made up more than a third of the S&P 500's return since 1926.

But what sets the HYP strategy apart is its focus on growing dividends. By buying companies with a history of raising their dividend payouts, you're betting that they'll continue to raise those payouts -- providing you with an ever-increasing income stream.

The point of the HYP isn't capital appreciation, although that's usually an added bonus. The HYP is all about those growing dividends, aiming to provide an annual income that exceeds that of the current 10-year Treasury note (currently yielding 3.6%).

Best of all, that income is flexible. Investors far from retirement can reinvest the dividends to increase their holdings, thus multiplying their payouts. Investors close to or in retirement can use the payouts as income that supports their standard of living. But because the income grows, it has the potential to beat inflation. And when you add that to the capital appreciation, you can end up sitting on a pretty penny.

OK, but do you really mean "never sell"?
Now, this idea of intentionally not selling seems counterintuitive. At some point, perhaps when the stock has reached our price target, doesn't it make sense to sell and take the capital gain?

According to the HYP's original author, Stephen Bland, the strategy demands a different perspective:

High yield portfolio (HYP) shares are not bought with the intention of selling. Quite the reverse. They are bought to hold for income and continue to be held until such time as it might very occasionally suit the investor to sell, perhaps never. Selling is not the reason for buying, unlike value trading, where selling is the only reason for buying.

It takes some getting used to, but this passive approach prevents you from overtrading and making poor valuation decisions -- while simultaneously providing you with a growing income. Best of all? You don't have to worry about daily market fluctuations.

Between November 2000, when the original HYP was started near the height of the U.K. market, and December 2007, it returned 68% capital appreciation without dividend reinvestment (while the FTSE 100 lost 8.3%), and included a 5.9% annual dividend yield to boot. What's more, the dividends grew 29% in just seven years.

Now for the U.S. version
So what would a current U.S. version of the HYP portfolio look like? To compile the list below, I followed the HYP methodology and selected a diverse group of 15 S&P 500 stocks:

  • Capitalized at more than $10 billion,
  • With a strong history of increasing dividends,
  • An above-market dividend yield,
  • And sufficient ability to service current debt.

Here are a few of those stocks.

Company

Dividend Yield (ttm)

Nucor (NYSE: NUE  )

3.5%

Sysco Corp. (NYSE: SYY  )

3.4%

Eli Lilly (NYSE: LLY  )

5.5%

Caterpillar (NYSE: CAT  )

4.1%

United Parcel Service (NYSE: UPS  )

3.5%

Northrop Grumman (NYSE: NOC  )

3.4%

Reynolds American (NYSE: RAI  )

7.3%

Source: Yahoo! Finance.

A diversified portfolio of high-yielding stocks can create a pretty well-protected annual income stream. For example, with a $10,000 investment in an HYP with an average yield of 4.5% -- very achievable in this market -- an investor could expect around $450 a year in dividends -- for now. But because each of the stocks in an HYP has a history of increasing their payouts every year or so, that dividend figure should continue to grow (ideally 5% annualized, or more), providing the HYP investor with ever-expanding income to reinvest or live off of.

Foolish final thought
The High-Yield Portfolio strategy isn't the Dogs of the Dow, nor is it a magical formula or technical trading tool. It's simply buying strong companies with proven dividend track records and holding them for the long run -- then remaining patient enough to give the dividends time to do their job.

If you're interested in constructing an HYP of your own -- or if you'd simply like to learn more about dividend-paying stocks -- consider a free 30-day trial to our Motley Fool Income Investor service. We recommend two new picks every month, as well as our best bets for new money now. A free trial lets you see all of our current recommendations, which are beating the S&P 500 by more than four percentage points with an average yield of 7%. Click here to get started -- there's no obligation to subscribe.

This article was originally published on Aug. 19, 2008. It has been updated.

Todd Wenning will be tracking the HYP portfolio on Motley Fool CAPS. Click here to check the performance. He does not own shares of any company mentioned. United Parcel Service, Eli Lilly, and Sysco are Motley Fool Income Investorpicks. The Fool's disclosure policy is a long-term buy and hold.


Read/Post Comments (7) | Recommend This Article (97)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2008, at 4:16 PM, chemdude47 wrote:

    This stock investment theme has its appeal, especially in this environment. A growth stock with no dividend or a meager dividend may provide no capital appreciation for a long period of time (not uncommon for growth stocks). Even if a 0.5% dividend is doubled every 8 years (9% dividend growth, and pretty good), it will take a generation to reach the 4.5% average of the stocks above.

    I am surprised you did not have any energy, utility, or tobacco stocks on the list above. In the last twenty to thirty years, it seems selected high quality companies in those areas have sported both the size and growth of dividends this list envisions. Are you thinking that the next twenty to thirty years will be different for these companies?

  • Report this Comment On October 24, 2008, at 5:26 PM, pohaku808 wrote:

    Aren't there ETF funds that duplicate this approach? In order to minimize transaction costs and obtain on-going rebalancing wouldn't it be more beneficial to make a single investment into a High Yield Divident Achievers fund and continue to dollar cost average into this holding?

  • Report this Comment On October 25, 2008, at 1:36 PM, StocksYouth123 wrote:

    I must agree that there are most likely more stocks out there that fit the profile, but I like that fact that all these stocks are going for under $100. Quite often recommended stocks are too expensive, for even one share because I don't have the funds! I like this take, and have used part of it to set up my accounts--the part that says find a good quality company that pays increasing dividends. I also have tried to find those with montly dividends so that there is more each month, not just quarterly. Wouldn't it be wise to find 20-30 stocks and take your pick of those???

    Thanks for the recs. tho.

    And, pohaku808, with doing your own investing at $4-8 per trade, in this market why make just one investment? I like previous advice to buy several times throughout the months and cost average!

  • Report this Comment On October 28, 2008, at 1:28 PM, ProcessMaster wrote:

    Regarding a single investment/vehicle that would mimic a high yield collection of stocks; what are each of our thoughts about Claymore's offerings: CVY and HGI?

  • Report this Comment On October 29, 2008, at 12:46 AM, NEWSMONKEY wrote:

    Sell this rally if you know what is good for you. The reasons are simple and relatively straight forward. Firstly, nothing has changed if anything things have gotten much much worse. The dominoes are falling one by one and leverage is getting wrung out everywhere. Consider Russia which had about 500 billion in reserves and a dollar squeeze of over 300 billion due to maturing dollar denominated debt. Russia is an outlaw in the financial markets consider this action they took today: Court Freezes Altimo's Stake in Vimpelcom http://online.wsj.com/article/SB122516354059275209.html?mod=...

    Further consider these articles today concerning the european nations and England

    Europe Faces `Huge Threat' as Emerging Markets Slide http://www.bloomberg.com/apps/news?pid=20601068&sid=aahr... or this article http://blogs.wsj.com/economics/2008/10/24/emerging-market-as... or this one which puts the The scale of euro zone loans at about $2.5 trillion in foreign-currency loans to emerging markets. http://news.bbc.co.uk/2/hi/business/7693020.stm

    European banks have lent heavily to crisis-stricken eastern European countries such as Ukraine, Hungary and Belarus. Their exposure which came to a head today makes the US sub prime mess look like child's play given there relative GDP size the problem is more than 5 times that of the US problems. Add to that Iceland, Turkey, Dubai, New Zealand, Argentina and Brazil thrown in just for good measure. These are problems only just coming to light today or in recent weeks. The world is an absolute mess and they are starting to fall like dominoes. Unfortunately once a massive deleveraging like this begins it won't stop any time soon.

    If you are kicking yourself for having not sold sooner don't miss this gift. The rally may last a day or a week but be certain it wont last. This is a prelude to an utter collapse. Consider this article by Nouriel Roubini, Who is he? He was the guy calling for this disaster over two years ago. The New York University professor who predicted the financial crisis in 2006 Bloomberg (October 27, 2008): Roubini Sees `Significant Downside Risk' for Equities http://www.rgemonitor.com/blog/roubini/ If you are thinking about buying now you should spend some time on his blog and I guarantee you won't.

    The monkeys on CNBC (my brothers) call for a bottom being made about 100 times a day. Before you commit the last of your capital trying to buy the bottom ask yourself this question. Who is dumber them for losing the first 35% or me for losing the next 35% because I thought I was smart? So what is the answer? Are you really that smart? Are you really that well informed? Or do you make most of your decisions based on what you see on CNBC?

  • Report this Comment On October 29, 2008, at 2:02 AM, dividendgrowth wrote:

    A pretty decent list, but why in the hell do I want LLY? PFE has more net cash on hand, lower P/E, and much higher dividend yield, and didn't blow money on some desperate Imclone deals!

    As for RAI, why not PM or MO?

  • Report this Comment On October 29, 2008, at 2:05 PM, TheMarkman wrote:

    I found this article interesting enough to read the originals at MTF UK. I also read elsewhere on this site about the S&P 500 Dividend Aristocrats, which tracks companies with histories of increasing dividends over 25 years. That's a better starting place to conduct research than Yahoo Finance. You can find the list of companies in that index at

    http://www2.standardandpoors.com/portal/site/sp/en/us/page.t...

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