Financial Abundance Guide

In the November 28th Wall Street Journal, Jonathan Clements seems to suggest that investors increase their yield on the fixed asset (bond and bond funds) portion of their portfolio by buying stocks (especially banking stocks) with a high dividend yield.

What his column seems to ignore is that a significant reason to buy fixed assets is to provide diversification and protection for when the stock market tanks. High yield stocks have a high yield because the company can find nothing better to do with their income than to redistribute it to their shareholders.  Stock holdings in these companies can often be a high risk investment.

Often, high yields occur when a stock price falls precipitously. Consider Washington Mutual (WM) which currently yields around 13%. This stock has fallen approximately 60% since June, when it’s 5% yield was considered high. In WaMu’s present financial condition, the odds are very high that the dividend will receive a substantial cut in the near future.

The reason to diversify into fixed assets is not for your fixed income investment to outperform the equity market. You diversify to lower your overall investment risk. Short term bonds, CDs and money market funds will hold most, if not all of their value when the stock market sinks. High yielding stocks will fall with a falling market, often at an even faster rate than the overall market.

If you choose to chase high yields, be sure that you do not confuse stocks with bonds. Keep your high yielding stocks on the stock side of your portfolio. They are NOT fixed assets that will hold their value when the market declines.