A Peek at Jim Cramer's Portfolio

(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.

So there's a place for a dividend portfolio, definitely. And that place, at least for most of you, would be your Individual Retirement Account, better known as IRA, where you could reinvest your prodigious payouts and let them compound tax-free for years, even decades. The dividend tax rate may be a paltry 15%, but I would rather keep that 15% for the purposes of growing my capital, as an IRA allows you to do--no taxes on anything inside the account until you pay income tax on the money you withdraw after you have retired. That's a subject I'll tell you more about later, for now let's concentrate on using high-yielders to get your retirement portfolio and your non-retirement or as I call it, your discretionary portfolio, back to even, the milestone you need to reach with your money before you can get rich.

To that end I have put together a diversified portfolio of intentionally high-yielders with the help of Dave Peltier, who knows all of this stuff cold as the writer of the Dividend Stock Advisor newsletter, part of the line-up of excellent services TheStreet.com offers to investors seeking knowledge about investing and rigorous analysis in this most critical area. Granted, it's my own company I'm writing about, but it really does offer subscribers practically endless resources. With Dave's assistance I came up with five terrific stocks, or actually four stocks and one ETF, which you can pick and choose from, use as the template for a dividend portfolio, or simply view as examples of what to look for, not just in a high-yielder, but in any stock before you buy.