(Editor's Note: Jim Cramer will be at the Borders in Westbury, NY at 7:30 p.m. on Dec. 15 to discuss the following excerpt on diversified dividend portfolios and more investing ideas from his new book Getting Back to Even. You can also meet Jim and get your copy signed.)
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.
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.
The ImClone acquisition was worth every penny. Its strong biotech franchise provides immediate growth, the kind that companies like Lilly salivate over, thanks to the cancer drug Erbitux. The acquisition also helps bolster Lilly's drug pipeline before its current top-seller, the anti-psychotic Zyprexa, stands to lose patent protection in 2011. Thanks to Erbitux, Lilly is now one of very few companies with a strong anti-cancer franchise, a category of drugs that governments around the world are still willing to reimburse insurers for. That matters at a time when almost every developed country faces ballooning budget deficits, and the President of the United States is committed to cutting healthcare costs.
The ETF has paid a monthly dividend since inception in 2006, ranging from 10-12 cents of late. Based on the most recent payout of 11.404 cents, the fund yields 11.6%. That's about 4 times the average yield of the benchmark S&P 500. I am including this ETF because I don't want to single out any particular bank preferred for fear that the bank might stumble, but taken collectively the yield here is simply too juicy to ignore, now that it seems very unlikely that the government would nationalize the banks.
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