One Annoying Thing About Some Dividend Investors…

By: ispeculatornew
Date posted: 03.19.2013 (3:00 am) | Write a Comment  (2 Comments)

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em-high-yieldI am a big believer in passive income and obviously, dividend investing is a critical part of my strategy and will likely be in the future. It’s an approach that I believe in because of the methodology that’s involved and long history of success. If you’ve been active to any extent on the internet, you’ll know that I’m not exactly alone. Looking for yield is now an incredibly popular idea not for smaller investors but also institutional clients, pension funds, etc. A big part of it is the fact that interest rate yields are close to 0% and that most of us do plan on living on our investments at some point.

There is one very annoying thing though that I keep getting upset about…

“It’s Not All About The Yield”

So many investors buy stocks like Frontier Communications Corp (FTR) because its 10% dividend yield is the top one in the S&P500 of they buy high yield bond ETF’s like JNK, HYG or PHB. I’m not saying those are bad investments but I’ll say that they are terrible if they are made solely on the basis of their yield. Let me put it this way…

Would you rather own a bond ETF composted of high quality stocks such as Apple (AAPL), Google (GOOG), Microsoft (MSFT), etc that pays 3% or owning high yield/distressed debt that pays 5-6%? You might say the high yield stuff. What if the difference diminishes a bit more? At what point would you go for the safer alternative? Because as we’ve seen not so long ago, when things go downhill, those high yield bonds will be the first to drop their payouts and to go under.

And yes, FTR is paying 10%… but very quarter, the company is paying out more than it’s making. Do you think that money is coming out of thin air? Hint: No, it’s not. Every quarter, shareholders equity is becoming less valuable.

High Yield Can Still Work

I’m not saying that investing in higher yield instruments is stupid. In fact, I’m currently working on a higher yield portfolio. But there is much more to it than just looking at the dividend yield. It’s about defining what you’re looking for in your portfolio. In my USDP portfolio, it’s about finding stocks with a safe yield that will increase dividends at a faster pace than inflation no matter how the economy performs. Obviously, if you’re willing to sacrifice some growth, higher yields will be within reach. But yield is not free, it comes at a cost.

What are your thoughts?

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2 Comments

  1. Comment by Johan Lindén — March 19, 2013 @ 10:51 am

    My thoughts are that you are a clever writer. When I first read that you were a “yield investor” I thought you were one of those FTR stock buyers. So far from reading this blog I like what I see.

    Good luck!

  2. Comment by IS — March 19, 2013 @ 10:52 am

    @Johan – Thanks a lot!

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