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Three Types of High Yield Stocks

“So what are you waiting for ? Put some high yield into your portfolio and boost your income performance today.”

Reaching for High Yields Reaching for High Yields

Some people are so afraid of High Yield Stocks that they shy away from them. The end result being that they have cost themselves thousands of dollars in potential income.

The thinking goes because most of the blue chips only pay 2-3% in dividend yields and the average for the S&P 500 is around 2.5% that anything beyond that is “High Risk.”

Being prudent and cautious in the investing world is a good trait but come on folks, use a little bit of common sense also ! Why don’t “Blue Chip” stocks pay higher dividends then? The main reason is because these stocks are highly desirable and the demand for the stock drives up the stock price and the higher the stock price, well it cause the yield to decline. Another factor is that these behemoths are for the most part very mature and as such grow slower that the younger, smaller and more nimble companies. There really is no comparison.

There are basically three types of high yielding stocks:

  1. They are in naturally higher yielding sectors. Example of these are REITs, MLPs, or BDCs. All sectors known for paying out higher yields. Other examples are Tobacco stocks, and communication stocks, think Phillip Morris, AT&T, and Verizon.
  2. Stocks that are in sectors that for no reason of their fundamentals have found themselves in an “out of favor” scenario with investors. Now admittedly you may want to take a very close look at these stocks first, but this is where you can usually pick up some bargains and buy stocks at higher yields than normal. An example is when a whole sector of stocks are out of favor for one reason or another. An example is tobacco  stocks. At one point everyone thought for sure tobacco was going away but the brave souls that stepped up and purchased the stocks are much wealthier for having the guts to buy them. Another are was the coal stocks, I myself saw 50 to 150% gains on these stocks because everyone convinced themselves that coal stocks were doomed. (And they might be in the very long run, but short term I knew coal could not go away over night) Just a little common sense and you could see how impossible and impracticable it would be to replace coal plants. Things like this takes years and decades to play out.
  3. The third type of high yielding stocks are the ones that are out of favor because of their poor company fundamentals. These of course are the stocks you want to avoid at all costs if you can. Leave the purchasing of these stocks to speculators and gamblers because you will not receive warning before they go bankrupt and rest assure the bigger players will always get out ahead of you and you will be left with nothing but memories.

So in my  opinion it is not only okay to seek out higher yields it is highly desirable. Even when I am purchasing “Foundation Stocks” and all things are equal I ALWAYS pick the stock that has the higher yield. Even a quarter or a half a percent can make the world of difference over a long period of time.

When purchasing stocks keep in mind your desired total yield for your portfolio. If you desire a 10% overall yield for your portfolio then seek out stocks that are at or near that yield. But when doing doing keep in mind why is it at that high of a yield. Is it simply because of a sector selloff  because there is a temporary factor that is causing the sell off? Is the stock in a normally higher yielding sector such as a BDC (Business Development Company) or a REIT (Real Estate Investment Trust ) ? Or the one you  have to be concerned with – because of the companies underlying fundamentals.

So bottom line – I don’t have any qualms about investing in higher yielding stocks but I am very careful and selective about it. It takes a little patience and a little more effort but the reward is certainly worth it. For an example say you have a portfolio producing 3% in income and you can push that up to 6% – well, look at the results:

$100,000 x 3% = $3,000 per year or $250 per month.

If you double that

$100,000 x6% = $6,000 per year or $500 per month.

And triple :

$100,000 x9% = $9,000 per year or $750 per month.

Now which one would serve you better? Personally I would choose the $750 per month in income ! Yet, very few do, because they have the misguided illusion that they will lose their money if they even attempt to invest in higher yielding stocks. In reality it is costing them big time not to invest at least a portion of their portfolios in higher yielding stocks.

I also want to briefly touch on one of the arguments against high yields. Many will argue that the stock cannot possibly sustain that high of a dividend. Well I have been doing this for many years now, and I can attest that most of the stocks I pick do in fact sustain their yields. One of my reasoning’s was that even if a particular stock cut it’s dividend 50% say from 9% to 4.5% it is  still a higher yield than the 3% stock ! Sure I have had a few disappointments with my methods but I am not married to the stocks. When a stock disappoints me I simply sell it and replace it with another stocks that has my desired yield. In many cases they are replaced with a yield that is even better than the original stock.

If this seems like something you would like to try for yourself but you are scared then what I would suggest is that you open a brand new brokerage account and use it to experiment  with. In this way you can limit your risk and it will give you a clear indication as to whether or not you can make it work for you. I would suggest picking maybe 5 stocks at most in a couple different sectors.

A sample pick of stocks might be:

  1. Whitestone REIT (WSR) – 10% – REIT
  2. Newtek Business Services (NEWT) – 9.1% – BDC
  3. Omega Healthcare Investors (OHI) -7.3% – REIT Senior and Assited Living
  4. Starwood Property Trust (STWD) – 8.88% –  REIT Diversified
  5. Vector Group (VGR) – – 7.64% – Tobacco & Real Estate

Note: Yields effective – May, 2017

So what are you waiting for ? Put some high yield into your portfolio and boost your income performance today.

 

 

 

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