(Editor's Note: Also see Cramer's Mobile Internet Tsumani Stocks from Jim's best-selling book "Getting Back To Even".)
Given all the benefits you get from owning stocks with high dividend yields, is there anything stopping you from putting together an all-dividend portfolio? Would that high yielding portfolio pass our standards of diversification as long as all of its stocks were in different sector, or would relying on dividend income for such a large portion of your returns be too much like putting all of your eggs in one basket? Remember, there are certain factors like inflation and interest rates that make dividend-paying stocks more or less attractive as sources of income relative to other investments. You could see how that might theoretically cause all high-yielders to trade closely in line with each other, but compared to other factors, like whether a stock's sector is in or out of favor, the attractiveness of its dividend as a source of income is just not that important, not as inconsequential as a drop of water in the ocean, more like a few buckets of water in a swimming pool.
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So here's what I would say about whether a portfolio of all high-yielders could be diversified: it depends. You would be walking a fine-line between diversification and non-diversification, but not because all your stocks would have big dividends. Bear in mind, when we talk about a diversified portfolio of stocks we mostly mean diversified by sector. And companies that pay consistently large dividends are hard to find in some sectors and plentiful in others. Even if you did make sure there was no overlap, you still would lack some important groups like fast-growers, and growth is precious on Wall Street. It's hard for me to imagine an event that made paying a dividend a huge liability and crushed every high-yielder out there, especially since the companies could simply eliminate their dividends.
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