Having a mix of different kinds of stocks in a portfolio is good for diversification. If one industry goes down, it may drag a few of your portfolio stocks along with it, but for the most part the others may offset or lessen the share price loss.
However, when it comes to ensuring you have a steady flow of income, either in the years leading up to or throughout your retirement, having a concentration of dividend income stocks early on is quite important.
Sometimes investors think more about the share price rising than the dividends they get annually. That's misguided.
Studies have shown that over a long period of time, dividend income can make up as much as 40% of your total shareholder return. Picking quality high-yield stocks that can grow dividend payouts over many years is essential.
If a company increases its dividend about 7% annually, the dividend will double in about 10 years. Along the way, you reinvest the dividends and the power of compounding will grow the total value from there. You have to plan to be rich, it doesn't just happen.
Here are two high-yield stocks that I believe every portfolio could benefit from. Consider how each one may work with the stocks already in your portfolio.
— Transurban Group (ASX: TCL) is an infrastructure company that owns, operates and manages a sizeable number of toll roads in Melbourne, Sydney and now Brisbane. Among them are the Lane Cove Tunnel, Hills M2 and CityLink.
Toll road and tunnel operators have the natural advantages of low competition and high barriers of entry to give them more stable income over long periods of time. And if you own a series of major roads in a city, you can figure your revenue rising roughly at the rate of traffic growth for decades. The stock offers a 4.5% dividend yield partially franked. The long-term dividend growth potential is very attractive.
— Woodside Petroleum Limited (ASX: WPL), the largest energy producer in the S&P/ASX 200 Index (ASX: XJO), has several LNG projects producing gas offshore near WA, and is looking further afield for new oil developments. The individual projects can take years and billions of dollars to complete, but afterwards they can have long lifespans of oil and gas production.
The company's LNG revenues and subsequent earnings can become like a utility company that steadily churns out dividends for shareholders, and it has the ability to raise the payout over time with new oil developments. It has a great 5.9% yield fully franked. Woodside also has a good track record of raising dividends over the past ten years.
