The High-Yield 'Sweet Spot' That Leads To The Best Returns

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As many of you know, I recently took over as Chief Investment Strategist of StreetAuthority's premium newsletter, The Daily Paycheck . But the truth is, I've been a devoted income investor for years. So when I took over the newsletter, I was pleased that the portfolio holdings were equally split among three types of dividend stocks : High-Yield Opportunities, Fast Dividend Growers, and Steady Income Generators.

The critical discovery I've made over the past five years is that by using the right combination of dividend stocks, you can you create a retirement portfolio that maximizes income, maximizes growth and minimizes risk.

This is exactly what my Daily Paycheck Retirement Strategy is all about. It's how our portfolio has been able to collect nearly $114,000 in dividends since 2009, while growing from an initial value of $200,000 to over $340,000 during that time.

As I said, our strategy uses three types of dividend stocks. But for the purposes of today's essay, I want to focus on one type -- the one we use to maximize income. Of course, I'm talking about high-yield dividend stocks.

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I doubt I need to tell you the primary benefit of this elite category. High-yielding securities are defined by their generous income payouts. This makes them particularly attractive for anyone looking for a large income stream in retirement.

But you need to be selective. When it comes to high yielders, the biggest isn't necessarily the best. Instead, you want to find something in what I call the "high-yield sweet spot," a segment of dividend-paying stocks that consistently performs well over the long haul.

Professor Kenneth French, world renowned for his financial research, painstakingly ranked the performance of all U.S. stocks from 1927 through 2013 according to yield.

He discovered that there's a special group of high-yielders that outperformed all others, returning an average of 14% per year.

high-yield dividend stocks

This "sweet spot" isn't made up of the absolute highest yielders -- for instance, those with 18% yields and up. According to Dr. French's findings, some of the best high yielders are those that pay above-average yields -- but not so high that they can't afford to keep paying them.

That's the "sweet spot"... and that's the group I focus on.

So in the high-yield section of my Daily Paycheck portfolio, the yields start at 7% and go up from there. The average holding yields about 9%, but the portfolio also includes a couple of double-digit gems.

Let me show you an example from my portfolio that illustrates what I look for in a high-yielder. Gabelli Multimedia Trust (NYSE: GGT ) is a closed-end fund that has traded on the NYSE under the ticker symbol GGT since 1994. The fund holds an unusual mix of very dependable cash cows and aggressive growth stocks -- from rock-solid global telecommunications firms to fast-growing internet companies.

We first bought shares in August 2010 . Our total return, including thousands in dividends we've received over this time, is 71%. The fund has a mouth-watering yield of 11%. So if you invested $10,000 in it tomorrow, you could immediately start collecting about $1,100 annually.

But Gabelli isn't the only one like this. There are plenty more.

In fairness to my paid subscribers, I can't show you the names of all my high-yielders. But I can tell you that one of my current holdings yields 9% and has returned over 97% since 2010. Another yields 7.6% and has returned 63.7% since 2010.

All of these holdings are right in the "high-yield sweet spot," and pay an average yield that's more than four times greater than the S&P 500. They have paid my Daily Paycheck subscribers thousands of dollars over the last few years -- and they could do the same for you.

But beyond these high-yielders, I have two other groups of dividend stocks specifically designed to maximize growth and minimize risk. As I mentioned earlier, it's how we've been able to create an income portfolio that's paid nearly $114,000 in dividends year and has delivered a 70.2% return since inception.

I want every StreetAuthority reader to have the opportunity to create a dividend-paying portfolio like this. That's why we created a special report to help you get started. To check it out, simply follow this link .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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