Are you building a strong dividend portfolio? Let’s say your portfolio already has Dividend Aristocrats from the energy sector. But having too much exposure to one sector increases concentration risk. You should diversify investments across stocks of different sectors and asset classes that are uncorrelated to strengthen your portfolio.
How to create an all-weather dividend portfolio
For instance, energy and telecom stocks are not similar. While energy companies cannot determine the price of oil, telecom companies can determine their subscription price. And telecom companies can cross-sell different products to existing customers, which energy stocks can’t. Having significant investments in both sectors could mitigate your downside risk when oil prices fall.
If you add alternative investments, like gold stocks, which tend to rise in an economic crisis, it could hedge the downside in the energy and telecom sectors.
How to enhance the yield of your dividend portfolio
You can improve your portfolio yield and reduce risk by diversifying across different high-dividend stocks. Such stocks carry a risk of dividend cuts when faced with a crisis, but they generate high yields in a growing economy. Here is a small-cap, high-dividend stock that is often overlooked.
Canada’s largest refined sugar supplier, Rogers Sugar (TSX:RSI), supplies sugar to Canada, the United States, and several European countries. This stock is overlooked, as it doesn’t show much volatility in the stock price, which hovers between $5 and $6.5. Since January 2011, the stock breached its range and fell below $4.5 twice: in the March 2020 pandemic dip and November 2015.
Rogers Sugar stock is resilient, because it operates in the consumer staples sector, where demand is stable. The demand increases with the change in demographic. If demand is relatively stable, it means any stock price fluctuations come from the supply side. Sugar stocks could rise if there is a sudden sugar shortage due to poor crop yield, maintenance at a major sugar producer, or an international trade ban.
The stable demand brings stable cash flows to Rogers, which it passes on to shareholders through dividends. Rogers Sugar has a high dividend yield of 5.8% at present. It could sweeten your passive income.
How to invest in this high-dividend stock
I will reiterate that high-dividend stocks carry a risk of dividend cuts when things get tough in the macroeconomy. But such macro events happen less frequently. In its 18-year dividend history, Rogers Sugar changed its dividend frequency from monthly to quarterly in 2011. That reduced its annual dividend per share by 30%.
But the company maintained its quarterly dividend amount for over 12 years and could continue doing so. Every crisis enhances the efficiency of a company, which helps it tackle the future crisis better. You could buy stocks like Rogers Sugar at a dip to lock in a higher yield. Until the next dividend cut, you can enjoy a higher yield and take advantage of the Rule of 72 (72 divided by the rate of return). This rule tells you how many years it could take for your money to double if your investment earns you X rate of return.
Going by this formula, Rogers’s current annual dividend yield of 5.8%, if reinvested, can double your money in 12 years. If you purchase Rogers stock when it falls to $5, you can lock in a 7.2% annual yield. A 7% yield can double your money in over 10 years. This window of high passive income can help you double your money before the next crisis.
You likely have large-cap Dividend Aristocrats giving you growing passive income. By adding a pinch of high-dividend stocks, you can enhance your portfolio’s overall yield while keeping the risk low.