It’s natural that I want to try and achieve the highest possible return on my investment. Yet in reality, I have to be careful not to just look at the potential reward, but also the level of risk involved. I can still balance this tightrope with high-yield income stocks. In fact, when I run the numbers, it could improve my potential profits significantly. Here are the details.
Managing my risk
One of the traditional investment strategies when it comes to stocks is to have the majority of my money in a core portfolio. This includes my long-term shares, reliable dividend payers and other ideas. Around my core portfolio I can have my satellite stocks. This is for more unusual ideas, high-growth options and potentially some small-cap or penny stocks.
Even though I don’t intentionally mean to follow this approach, I can group my portfolio in this way. When I refer to the high-yield income section of the portfolio, it’s in the satellite section. As such, I’m already managing my risk here. High-yield dividend shares are usually greater in risk, possibly because the share price is falling. But as I’m only going to allocate 15-25% of my overall pot to this area, any negative impact should be cushioned.
But if I’m only putting a small amount of cash here, can the returns really move the needle? Yes!
How high yield stocks boost my return
Let’s assume I have 75% of my portfolio in relatively low risk investments. I’m going to assume an average annual growth rate of 5% from this area. This is a mix of share price growth and some dividend payments.
For the remaining 25%, I’m going to focus on dividend stocks with high yields. Within the FTSE 100 and FTSE 250, there are currently 10 stocks with dividend yields above 9%. I wouldn’t buy them all, as some I don’t like the look of. For example, I recently wrote about why I don’t feel the Persimmon 18.5% yield is sustainable.
Yet even by excluding some, I can still find five shares I’m happy to buy. Now here come the numbers. If I purchase these stocks, my high-yield portfolio should offer 9%. This portion is a quarter of my overall investment pot.
Previously, my average forecast return would be 5% (100 x 0.05%). Now it has become 6% (75 x 0.05% + 25 x 0.09%). This is a 20% uplift in my overall return (5% up to 6%.
A smart call for next year
As we go into 2023, I’m going to make a conscious effort to include some higher-yielding stocks to my portfolio. My aim is to replicate the above format, to boost my potential profits. I call it potential, because there’s no guarantee when it comes to dividend payments and I could lose money as well as make it.
Unlike a bond coupon, a dividend is paid completely at the discretion of management. So my income potential does have the risk of being different to what I’m anticipating, depending on how each business performs in the future.
Ultimately though, I think that my diversifying my risk and allocating a relatively small amount to this idea, the reward should outweigh the risk.
