First, dividend paying stocks are believed to be less risky than non-dividend paying stocks. The reasoning is as follows. In a down market, investors will be inclined to hold dividend stocks because they are “paid for waiting,” and thus declines are muted compared to non-dividend paying stocks. In addition, a company that pays a dividend, has made a commitment to shareholders to return value in cash every year. This commitment, it is believed, adds value and reduces risk. Finally, dividend paying companies are generally more developed and profitable than non-dividend paying companies, and thus, inherently less risky.

Second, you can buy a dividend paying stock and still have impressive capital gains. Dividend paying stocks go up and down just like other stocks, and if one can invest in the stocks with the most potential, impressive returns can be achieved while managing risk at the same time. For example, Chevron (CVX), the second largest domestic oil company, was added to the pilot portfolio on 03-20-06 at $56.91 per share, with a current dividend yield of 3.2%. This is a hugely profitable, very large company, with a nice dividend. The stock was sold in the pilot portfolio on 10-27-06 at $67.64 per share. The capital appreciation on the investment was 18.9% plus two dividend payments of .52 per share, or 1.8%, for a total return of 20.7% in approximately 7 months, or an annualized rate of return of approximately 35.5% -- outstanding performance considering it is an industrial, lower risk, dividend paying company.

Third, manage risk. All stocks have risk. The strategy screens stocks for the qualifying criteria of dividends and capital appreciation, then stocks are eliminated from consideration for myriad reasons: earnings coverage for the posted dividend is not adequate, the company is not in a good position versus its competitors, the chart looks bearish, management seems inadequate, selection would overweight the whole portfolio too heavily in a certain industry, and so on and so on. Once a stock is finally added to the portfolio, risk weighting is used to reduce risk further. Specifically, low to medium risk stocks merit larger positions than medium to high risk stocks. In this way, the portfolio is weighted towards the lower end of the risk spectrum.

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