A High-Yield Approach to Value Investing

by Wayne A. Thorp

Conservative investors are attracted to dividend-paying stocks because the dividends—and the yields on dividend-paying stocks—provide a measure of safety from market declines.

A conservative, low-cost way to invest in dividend-paying stocks is through dividend reinvestment plans (DRPs), particularly those that will sell their initial shares directly to the public (direct purchase plans). With these plans, dividend payments are put to work immediately with little or no transaction costs involved. [See our annual guide to direct purchase plans.]

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One potential pitfall to investing only in companies with dividend reinvestment plans is that you may overweight your portfolio in a particular area of the market. That’s because companies that offer dividend reinvestment plans tend to be concentrated in certain industries, such as financial firms. Concentrating your portfolio in a limited number of industries will lead to a portfolio that is undiversified—a big risk for which you are not compensated by higher rates of return.

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