Let's Not Obsess Over Dividends

Not a day goes by without an investing pundit preaching the virtue of dividends and how they are essential to any and every portfolio. We would like to remind investors that this is only half-true. While very few investment portfolios shouldn't have any dividend stocks, stuffing your portfolio with dividend stocks is just as unwise, for the companies with the highest potential for total return are usually not lofty dividend payers. At Helix Investment Management, we take a different approach to dividends. To us, common stocks are meant for one thing: capital appreciation.

We like yield as much as anyone, but do not think common stocks are the best way to go about generating yield. If your portfolio needs yield, go with preferred stock, or a mortgage REIT. Mortgage REITS like Annaly (NLY) and American Capital (AGNC) yield over 15%, beating anything offered by large-cap, blue-chip stocks.

When building a solid portfolio, do not start by screening for yield. That should be a consideration, but a minor one at best. Our portfolios are built using this approach. In instances where yield is needed, we turn to preferred stock. The ETF we use for this, the iShares S&P U.S. Preferred Stock Index Fund (PFF), yields 7%, a great rate with much less risk than traditional common stock.

Dividends are a good thing, but the hunt for them should not consume your portfolio and drive your investment decisions. Look for stocks that have the potential to appreciate significantly. And if they have a dividend, then so much the better.