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I rarely own a stock that doesn't pay a good and growing dividend, and you only recommend growth stocks. Do you publish a dividend-focused newsletter?

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Q: I rarely own a stock that doesn't pay a good and growing dividend, and you only recommend growth stocks. Do you publish a dividend-focused newsletter?

A: Dear Subscriber,

We don't publish any newsletters focusing only on dividend stocks. However, if you dig deeper into our portfolios, you'll find we don't invest only in growth stocks. We look for growth and value; most of our recommendations offer a bit of both.

In many (probably most) cases, when an investor seeks “good” dividends she means “high-yield.” Unfortunately, we've found that portfolios of high-yield stocks tend to end up heavily concentrated in a few sectors or industries. While they pay generous dividends, such portfolios are a lot riskier than they appear because of the lack of diversification, and as such we cannot recommend a yield-focused approach. However, we share your passion for dividend growth, and most of the dividend-paying stocks we recommend have strong growth histories.

For most investors seeking high income, we recommend two strategies that dovetail neatly with the stocks we recommend:

1) Don't rely on stocks for all (or even most) of your income. Bond funds such as the ones we recommend in our mutual fund portfolios can generate income comparable to that of an income-stock portfolio at substantially lower risk. All investors should probably keep at least a small portion of their investments in fixed-income, while those who are older and/or dependent on their portfolios to support their lifestyle may wish to invest a higher percentage in bonds or bond funds.

2) For the equity portion of your portfolio, in the long run you'll probably do better focusing on total return and selling periodically to raise cash if needed. After all, the goal isn't to maximize yield, but to maximize wealth. In our view, a diversified portfolio of mostly income-generating stocks should be able to outperform a yield-focused portfolio, probably with less risk. And if you grow your portfolio, you can create income via judicious selling.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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