One of the reasons I called this blog Active Passive Money, is to contrast with others that just talk about passive income. I believe that to build this passive income portfolio, you will need to actively work for it. And when you're just starting out, you have little capital to deploy. You can put it in a conservative growth stock, solid and safe. Or you can put your money into a higher yielder. Still a solid business but with a bit more risk. Perhaps they have a higher payout ratio, or shorter growth track record. Or perhaps their earnings aren't growing as fast as their dividends. The question is, how long before they run out of gas ? So here's what I did.
While I am fully aware of the dividend kings and many solid companies, I took some risk in higher yielding stocks. By high I mean the 6-8% range, so still nothing super crazy. All proceeds do not go back into those stocks though. Instead I use the income to build up a longer term sustainable portfolio. The higher yield, higher risk stocks require more active monitoring. In my case I got burned badly by ARLP, whose stock price declined by 20% since I bought it, and I even averaged down with a second investment. One may argue against the coal business long-term, and I would agree. In the coming 50 years, I don't think solar and geothermal energy will replace coal. So I still think the business is good. ARLP raised their dividends this year. And the decline in value is off-set by their continued payouts.
My other higher yield stock is TAL. They did not raise their dividends when expected in 2015. I still hope they will later this year. I will hold on to the stock unless they miss or cut dividend.
In summary, I think it is OK to use a higher risk investment to help generate cash to build up a lower risk portfolio.