How Many High-Yield Financial Stocks Does an Income Portfolio Actually Need?

Investors are mercurial, often pushing stocks and dividend yields higher and lower in dramatic fashion.

Ultra-high-yield financials like AGNC Investment and Ares Capital Corporation shouldn't be the foundation of your dividend portfolio.

When I was a younger investor, I focused on buying stocks with yields of 10% or higher. I no longer invest that way; instead, I focus on the company before the dividend yield. If you are a dividend investor looking to create a reliable long-term income stream, you should tread carefully when considering ultra-high-yield stocks like AGNC Investment (NASDAQ: AGNC) and Ares Capital Corporation (NASDAQ: ARCC) .

They aren't bad companies, but they come with an important risk you shouldn't ignore. Here's how you should think about stocks with yields that may seem too good to be true.

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Investors generally expect the market to return around 10% a year over the long term. Early in my investing life, I decided that if I could get a 10% yield on a stock, I would be way ahead of the game. I ventured into some pretty obscure investments, took on risks I didn't realize I was taking on, and even took on some huge risks I recognized but took anyway. A number of my ultra-high-yield stocks blew up on me. Think bankruptcies that left me with nothing but worthless shares, drastic dividend cuts, and lots of tax loss harvesting opportunities.

To be fair, there were some success stories in the mix, too. But there were too many bad outcomes to justify the approach. I finally learned that while I may use yield to identify investment opportunities, the real work starts at the company level. For example, Realty Income (NYSE: O) with a 10% yield was a gem. But buying a mortgage REIT at the start of the Great Recession was an error in judgment.

Today, I focus on having a core of great businesses. Typically, I like to see stocks with decades of annual dividend increases (think Dividend Kings , with 50+ annual hikes). I still make mistakes, but I've dramatically cut down the error rate.