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In 2018 my Dividend Portfolio showed a yield on 3.60%. That produced $6,483 in dividend income that year. (In this portfolio I put an equal $10,000 into each position and rebalance each year.)

The goal of this portfolio is to beat the yield on the 10-year Treasury. On January 1, 2018 the yield on the 10-year Treasury was 2.58%.

In 2019 my Dividend Portfolio showed a yield of 4.90%. I held fewer stocks in that portfolio that year but I still managed to produce $6,365 in dividend income that year.

On January 1, 2019, the yield on the 10-year Treasury was 2.71%.

But as THEY always tell us, there’s no free lunch in the financial markets. When you reach for yield above the “risk-free” return on Treasuries, you expose yourself to the chance that you’ll find yourself looking at a loss of capital.

And that’s exactly what my portfolio saw in 2018. Big time. The total return for that year was a negative 15.42% as some (many?) of the energy stocks and banks that I’d bought for the portfolio tumbled.

In 2019, despite the volatility of that year my total return was much better. The stocks in the portfolio dipped for the year but my price los was just 0.34%. The portfolio managed a 4.56% total return for the year.

The question that the results from these two years should raise in the mind of every dividend income investor is “How much risk to my capital am I willing to take on to beat the “risk-free” yield of a Treasury? That’s an especially important question in a period of extremely low yields. The yield on the 10-year Treasury today, was a very small 0.86%.

If you’re dependent on generating income from your portfolio a 0.86% yield is quite possibly a disaster. That yield is about one-third of the yield in 2018. I know lots of dividend income investors who use the income generated by their portfolio for such frivolities as rent or food or health care. Those folks can’t afford to see their portfolio income drop by two-thirds.

On the other hand, they also can’t afford to take too many years of 15% losses to their investment capital either. Finding that 15% in cash to top up an income-generating portfolio after an annual loss like that is quite possibly out of the realm of possibility.

Here’s the challenge that the current situation presents:

Ideally, we’d prefer a year like 2019 when we got a yield of 4.90% from the Dividend Portfolio at a “cost” of just 0.34%.

But while we prefer that situation to the loss to capital of 2018, we can’t always get what we want. Reaching for yield, and I only achieved roughly a 50% increase in yield over the 10-year Treasury that year, always includes the possibility of a loss. Of course, even owning the “risk free” benchmark Treasury cn produce a loss if interest rates climb, driving down the price of existing bonds, during the year. But still there is no doubt that reaching for higher yields adds risk to an income portfolio.

So how do you sort out your own response to the challenge of dividend investing in an extended period of extraordinarily low interest rates?

The answer is going to be a very individual one.

It will depend on, among other things, your ability to make up for capital losses by adding cash to your income account. It will rest on how much you need a specific level of income from your portfolio–even at the cost of some loss of capital. It will depend, too, on whether you are cool-headed enough to analyze what went wrong with a loss-generating portfolio in any particulate year and if your able to introduce changes that fix the problem (assuming, of course, that there is a fixable problem and you’re loss isn’t simply a result of random fluctuation in the markets.)

And it will also depend on whether your circumstances require you to focus on the return and any potential losses from each year or where you have the option and financial resources to work in a longer period.

On of the reasons I’ve devoted my most recent Special Report on my subscription site to dividend stocks is that 2020 looks like an extraordinarily good year for owners of dividend stocks. Now granted the 2020 isn’t over year, the performance for the year as of November 20 of the Dividend Portfolio is just about enough to make up for the loss of capital in 2018. The price gain for the portfolio is 8.93% as of November 20. The dividend yield is 3.13%. And the total return is 12.07%. The dividend income is $5324 as of that date

So far. I have hopes of making up for the total capital loss of 2018 this year. Although I know that it’s way to early to count my chickens.