5 Guiding Principles to Successful High-Yield Investing
– Tim Plaehn, Editor, The Dividend Hunter
In our investing world where bank CD’s pay 2%, long-term government bonds 3% and even junk bonds yield just over 5%, finding high-yield stocks that pay 7%, 8% 12% or even 13% every month just like clockwork is almost necessary to earn any sort of meaningful income.
Because my job has me interacting with investors of all kinds, those with small accounts and large, years of experience and none at all, I’m in a unique position to help you achieve your income goals. I know most if not all of the major problems that income investors face today.
Many investors want or even need a higher cash income, and high-yield stocks are one of the few options available to achieve that level of income. Most investors come into the high-yield stock space with ideas and beliefs that end up costing them both capital and income. High-yield investing can be risky if you don’t do your homework.
I’ve done years of research and have even more years experience investing in high-yield stocks. I know what separates the winners from the duds and, most importantly, which stocks pose the biggest risk to destroy capital.
My goal is to help you develop a reliable income stream that can help support your lifestyle well into retirement and beyond. To help get you started on the right path, here are my five principals that allow you to reap the excellent returns that can be realized from high-yield stocks while managing risk like a pro.
1) Understand why the shares of a company carry a high dividend yield. Yield is the current annual dividend rate divided by the share price. You may have heard that a high yield indicates the dividend rate may be cut or that the high yield shows a belief by investors that a stock’s dividend is in danger.
For a struggling company, that may very well be the case. The other possible scenario is that the market is wrong, and the dividend is very secure. The business results behind each high-yield stock must be closely analyzed.
Secure dividends from high yield stocks are a fraction of the total high-yield universe. You want to only own those stocks with both a high-yield and a safe dividend.
I go into more detail on how to find the safety of dividend payments in my monthly newsletter The Dividend Hunter where I recommend over 20 of the safest high-yield stocks currently available in the market.
2) Always remember that these are shares of stock trading on auction exchanges. The share prices of high-yield stocks can be as volatile as other stocks. It’s a reality that share prices can and will move up and down with occasionally large percentage moves.
Up is OK, but a 10% or 20% drop in share prices can cause an investor to panic. The high-yield stock investor needs to be ready for the down turns, because they will happen.Keep the mindset that as long as a company’s business is solid, the dividends will be paid quarter after quarter.
The good news is that historically the share prices of dividend stocks eventually recover. Once the market realizes those dividends continue to be paid, investors will bid up the share values.
3) Forget most of what you learned about the signals to to buy and sell shares. The generally accepted stock market advice will cause you to lose money with high-yield stocks. That’s a fact.
With income stocks, you must own shares to earn the dividends. You are not trying to time the market and not looking for an entry price. Not setting stop-loss orders (which I call guaranteed-loss orders). Not selling because the share price has fallen – another path to guaranteed losses.
The core of the return from high-yield stocks are the dividend payments. Track your dividend earnings (your broker doesn’t even do this) and you will see your income steady and growing quarter after quarter and year after year.
4) Strive for diversification. Most high-yield stocks come out of a small number of economic sectors. These groups include real estate investment trusts (REITs), infrastructure asset companies, finance companies and transport companies.
You can buy stocks to diversify inside of these sectors. For example, instead of buying three healthcare REITs because you like healthcare, buy one healthcare REIT, an industrial property REIT and a hotel REIT. With around 20 high-yield stocks you can end up with a significant level of non-correlated diversification.
5) Reinvest at least a portion of your dividends. If you are earning 8% to 10% from your portfolio of dividend stocks, that is significantly more than the 3% from a bond fund or 4% from a so-called dividend ETF.
Take some of those excess dividend earnings and put them back to work to buy more dividend paying shares. The math is simple, but compelling. If you are earning 9% on average and reinvest one-third of that, your dividend earnings will grow by at least 3% per year.
I say at least, because some of your dividend paying companies will also increase the dividend rates. This reinvestment plan also gives you the capital to buy when the market is down and when other investors are selling at a loss.
In practice, the emotional pressures of investing make it very hard to buy low and sell high. Reinvesting your dividends makes it close to automatic.
Bonus principal: Investing on your own can be mentally draining, especially when share prices are falling. Investors who have a place to ask questions and get answers about their stocks have an easier job to stay the course and let the high-yield stock strategy work its long term, very satisfying results.
Paying a modest subscription fee for a service that matches your investment goal will likely either save you $1,000’s from making a bad decision to sell at the wrong time, or help your grow your investment income by $1,000’s. Most likely it will do both.
My newsletter, The Dividend Hunter, has already helped out thousands of people achieve their income goals, and it can help you too. With the monthly issue, a new recommended buy every Tuesday, and our revolutionary Monthly Dividend Paycheck Calendar, a system that will put your income investing on autopilot.