The Three Stock High-Yield Income Portfolio

To keep things simple, here are three stocks that together should make up the core of a dividend-focused investment portfolio. Their average yield is 5.8%, and the portfolio will generate a growing income with cash flow growth of four to five times the current inflation rate.

I review, research, and recommend (or dissuade, mostly dissuade) a lot of higher yield dividend stocks. I evaluate income stocks based on yield, cash flow to support the current yield (safety), and dividend growth potential. I go over hundreds of earnings reports and conference calls every quarter, and out of all of those reports I have found a small number of stocks that continue to impress quarter after quarter. These are the income stocks that should make up the core of a dividend-focused investment portfolio.

This is a hypothetical exercise. I strongly recommend against owning just three stocks in a portfolio. I use approximately 20 stocks as an adequate number. But, it is also interesting to see what an investor could expect from just a few stocks. Consider the new stock investor who has or wants to put just a few thousand dollars into the market to start. The three stocks here would make a great starter portfolio for the investor who plans to add cash and buy more stocks as money permits. The goal in selecting the following stocks are to pick ones that have a higher degree of share price stability along with my over-riding criteria of dividend safety and dividend growth. Here is my hypothetical three stock income portfolio:

Main Street Capital Corporation (NYSE: MAIN) stands at the head of the class of business development companies (BDCs). A BDC is a tax-advantaged business structure that is required to invest its assets by providing capital to small and mid-sized corporations. Main Street Capital currently has about 200 client companies. The company primarily makes loans to client companies, but will also make small equity investments or take equity options as part of a client funding deal. MAIN share owners receive monthly dividends. Historically, the company has increased the dividend rate twice a year. Main Street has also paid up to two special dividends per year as a payout of equity investment profits. MAIN currently yields 7.7% and investors can look forward to annual dividend growth of about 5%.