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The Federal Reserve has indicated that it plans to keep record low interest rates for an extended period, and inflation seems in check. First quarter 2010 earnings should show up well in comparison to anemic 2009 figures. Retail sales seem to be coming back as we exit the recession. Unemployment has leveled off and may even be declining slightly. The overall market has rebounded significantly since the lows of March 2009 and there is still a massive amount of cash on the sidelines waiting for the right time to get back in.

On the other hand, our national debt has grown to an unprecedented level at a frightening rate with the addition of the stimulus package. Geo-political tension in the middle east remains at a critical level as we are still in two wars, have unresolved nuclear issues with Iran, and we see mounting problems in Syria as Al Qaeda looks for additional friendly places to regroup. The questions surrounding global warming remain unresolved and world efforts seem to be impotent to come to any joint agreements as to how to deal with this issue as evidenced by the “non-results” of the Copenhagen conference. Meanwhile our government is concerned that too much debt will cause a loss of confidence on the international front jeopardizing our ability to continue to finance further debt through selling treasury notes to China, Japan and other foreign countries. Ironically, despite those concerns we are now considering a second stimulus package to insure that we don’t fall back into recession. In short, the crystal ball that our economists look into for the future is perhaps a little more cloudy than usual as we look into 2010, and it is very difficult to forecast what is going to happen.

So what does this mean for high yield dividend stocks? As they say, it is always good to hope for the best and plan for the worst scenario. If 2010 turns out to be a continuation of the last three quarters of 2009 with on going low interest rates and an improving economy, then we will likely see the entire market continue to go up and high yield dividend stocks will rise in price right along with it. It is more important for us to dwell on the other scenario, that is, what if the coin falls the other way and 2010 turns out to be a downer for economic or geo-political reasons or a combination of both. Then what happens to high yield dividend stocks? If you are in the early stages of your investing career, and are trying to build a portfolio for retirement, a downturn in the market offers you an opportunity to buy quality stocks at bargain prices.

This is especially significant if you are following a dollar cost averaging program (buying a fixed dollar amount of a given stock or stocks on a regular basis) with high yield dividend stocks and are reinvesting the dividends. If you are buying on a monthly basis, the lower the stock drops the more shares you buy each month, and the dividend kicks in as an extra booster to raise your total yield as compared to a non dividend paying growth stock. On the other end of the spectrum, if you are retired and living on the income from your portfolio and you are holding quality high dividend yielding equities, you continue to receive your income stream regardless of whether the price has moved up or down. Compare that to a retirement plan that is based on taking a percentage out of a retirement portfolio consisting of non dividend paying growth stocks. Based on a projected annual growth rate of 8% it would have seemed reasonable to withdraw 4% a year out as income.

The problem with that scenario is that in the real world theoretical growth forecasts don’t always come true. If the market should take another drop in 2010 then withdrawing 4% might mean having to sell more stock than planned to maintain your income stream thereby reducing your future ability to meet your retirement goals. On the other hand the portion of your portfolio that is in quality high yield dividend stocks will continue to pay you at the same rate while you wait for the market to recover. So while your net worth may be lower, (until the markets come back) your income stream remains uninterrupted. Additionally, once a dividend is paid, the company can’t take it back if conditions take a turn for the worse. A non dividend paying company that has shown wonderful growth in its stock price can see it fall just as fast if some unforeseen problem arises.

So what percent of my portfolio should I put into high yield dividend stocks? This is a question that only you can answer. It depends on a wide variety of variables including your age, the amount of money that you have to invest, the time that you are willing to invest to insure that you have a portfolio of the best quality high yielding stocks, and most important of all your investment style and personal tolerance for risk. I don’t personally believe in a pat formula for determining what percentage an individual should have in each segment of the market. I do believe in doing your own research to be sure that you know and understand the companies that you are investing in, and in the case of high yield equities, why they are paying higher than normal yields.

Be comfortable with your portfolio and be sure that it passes the “good night’s sleep” test. If you are so worried about your portfolio that you can’t sleep then you are not investing within your personal tolerance for risk. Having watched enough of the talking heads on TV I can personally attest to the fact that there are economists and financial experts in abundance on either side of any position. Some say that the market will go up, some say it will go down. Some are very bullish on the economy, others feel that we are headed toward another recession. With the right mix of high yield dividend paying equities as a portion of a diversified portfolio that meets your own criteria and tolerance for risk you will be better prepared to build for the future or in the case of retirees, where the future is now, you will be able to rely on an uninterrupted income stream regardless of which way the markets go.

Copyright 2009 Boyd Investment Holdings LLC. All rights reserved worldwide.

Visit the High Yield Dividend Stock Report for further articles and a regularly updated high yield dividend stock list: http://bihdividends.blogspot.com This blog is dedicated to assisting investors with their due diligence in the highly volatile and often misunderstood category of high yield dividend investing as part of a diversified investment program.

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