The following is a guest post from Rob, a fan of My Own Advisor living in Munich, Germany.
Conventional wisdom says that high yields are a warning sign and for the most part I think the folks that share that wisdom are correct. But this year after selling off a large portion of my holdings, sitting out and waiting for the market “correction” that never happened, I decided to get back into the market. There was a problem with my plan though: everything I wanted to buy had gotten quite expensive. The stocks I wanted to buy were not overpriced but they were certainly above what I was willing to pay. That gave me pause for thought…
I decided to turn David Stanley’s Beating the TSX strategy on its head. Haven’t heard of his method? Well, it’s the Canadian cousin of the “Dogs of the Dow” strategy yet it applies to stocks on TSX index instead – focusing on undervalued and underappreciated U.S. stocks. You can read more about David’s strategy here.
What I did was search the whole Canadian market using sites like Top Yields and another site I know Mark has used in the past: Canadian DRIP Primer. I looked for stocks yielding over 4%. From the yield-screen I found about 10 stocks that were of interest to me.
From there I did the following…
1. I used this free stock analysis tool from Globe Investor and I typed the stock symbol I was interested in, example:
2. After searching for my company, I read this on the analysis page:
What this tells me is this stock (an example only here folks), Canadian Oil Sands is currently out of favour and I love high-yield out of favour stocks.
Does my work stop there? No. I still need to do a bit of research. I have to answer some questions that align with my risk tolerance and buying criteria (e.g., has the dividend been reasonably stable? Is there an obvious problem that I should be aware of?). After questions like these have been answered, I’m confident about my decision to buy or avoid this stock and move on to the next stock on my list.
This is my process for looking at higher yielding stocks, out of favour companies that definitely have some risk but I’m willing to accept that risk; companies I’m intending to hold through thick and thin.
Do you have any strategies to invest in higher-yielding stocks? If so, do tell.
Rob L. is a fan of My Own Advisor living in Munich, Germany. Rob is passionate about investing and is currently working through his own plan for financial freedom, about 10 years away.
My Own Advisor: The example listed in this article is for illustrative purposes only. You should consider consulting a financial professional before making any important investment decisions. All financial decisions are yours and your responsibility.
<images from Globe and Mail: http://www.theglobeandmail.com>
I don’t have a strategy for investing in high yield stocks because my overall investing strategy is to focus on ETFs right now, until I take the time to learn more about investing in individual stocks. This sounds risky but with greater risk comes greater reward.
Correct Daisy, higher risk, potential for higher returns but also a crash and burn.
Agree Mark, you can’t go wrong with a good ETF or a boring bank stock. Daisy just make sure you re-balance once a year.
BTW took a look at your blog, some cool stuff there
Apart for two companies and some venture ones, all the rest I have are high yield stocks.
What is my strategy? The same as for any stock; value investing, and of course I don’t follow the mainstream wise words that high yields are like sky is falling or other horses and dogs, even if that really applies for certain companies indeed. But as usual, always do your DD and nothing is better than follow your own way.
For notice, I don’t consider stocks with a yield < 3.5% at the current prices, out of some exceptions and ventures. I also don't chase obligatory high yield divi stocks, there is always a range between 3.5 and 6%.
“What is my strategy? The same as for any stock; value investing, and of course I don’t follow the mainstream wise words that high yields are like sky is falling or other horses and dogs…”
I hear ya. The talking heads no nothing about the future just like the rest of us 🙂
I figure you need to be comfortable with risk when it comes to high-yield stocks. Either you have the stomach for it, are ready and prepared for the risks, or you’re not. Thanks for the comment, good to hear from you.
Well it depends; some companies with a high yield stock haven’t more internal risk than their lower yield counterparts. What we can see is that for many of them the most of the risk is into their market prices and how they can swing over time, because of the usual irrationality but also a lot of fear, not always rational too, regarding these stocks. Sometime I question myself why some people, that I can see on bulletin boards and forums, even cash in on these stocks. And my answer is that they don’t do any DD and are attired by the stock’s yield like flies toward a light bulb, stocks that they buy so many times at 52 weeks high…
There is a good bunch of companies in which I will never put a $ because of their valuation and/or management and/or status, even if their yields are > 6%.
I think high yield stocks have a bad reputation because of these rotten apples.
I made, and continue to make good money on them. Sometime you can make a mistake of course, but IMHO it’s no different than to invest in lower yield stocks.
High yield is like undervaluation, in the sense that you need to know why a stock has this feature and how the company and its management work with it over time.
But yes you’re right, in the final they aren’t for anyone, it’s why there are so many ways to invest 😉
There are so many ways to invest, and there is absolutely no one “perfect portfolio” but I think indexing makes the most sense. Do you beat the index? Yes, but hard to do consistently over time!
My investing goals are not to beat the index but to mirror it for most of my portfolio and also get paid: dividends. Dividends are real, they are tangible whereas capital gains are not until they happen.
There are some interesting plays north of 7% right now, REITs come to mind. These buildings are not going to go vacant all at once, so I like REITs right now.
Well I don’t do indexing either, dunno where you seen that. I just look for undervalued companies that pay a dividend 😀
When I talked about the prices I explainded that generally with HYS that people tend to buy high and sell low by fear or other feelings than rationality.
In the 7% range there are some mortgage companies too.
No, not that you index, rather, there are so many ways to invest and I think for the majority of investors, indexing is the way to go because it provides diversification, reduces risk.
As for undervalued companies that pay a dividends, O&G stocks are taking a good beating now. I’m investing there as soon as I have some funds saved up.
I’m sorry then, I misunderstood. Fair enough!
Completely understand, honestly for most investors it makes sense to own a low cost ETF, This is something Garth Turner (greater fool) constantly hammers on, that is when he’s not complaining about the housing market, stick to ETFs and re balance once a year. As your experience shows it can be hard to separate winners from losers. While I do own individual stocks in Canada in the US I stick to a good ETF, the market is simply too vast to be able to diversify properly.
What did you do with your Yellow Media stock, did you sell it and off set your losses against other capital gains or are you still holding it
I am all about high yield but I also try to make sure the dividend is sustainable. Chasing yield alone can lead to some serious problems. I like to look at the payout ratio and see if it is too high. All the big banks have reasonable dividends with reasonable payout ratios (although the yields are lower). On the higher side is CPG; I like the business and have noticed that although the payout ratio is huge their cash flows are increasing. This is a good sign. I can’t predict the future but I do think their dividend is sustainable and its a high yield as well. Disclosure: I own shares in CPG
Agreed. I think CPG is a good example for many Canadian dividend investors. I’m always watching the payout ratios, I like my payout ratios to be under 70% for the most part.
Interesting, seen it around before but haven’t looked that close at it. Unfortunately it doesn’t offer a DRIP. Certainly a stock I’d look at, it’s underperformed the market by 15%.
Any thoughts on why it’s crashed so hard?
I was definitely bitten by yield chasing with Yellow Pages. Stupid me thought I go buy an individual stock and do OK … boy was I wrong. That was an expensive lesson. I don’t know what I was thinking. I avoid individual stocks for the most part unless I really know something good about them.
I have purchased Microsoft but I am in the tech industry, understand their business fairly well, and knew that they were starting to make changes that were going to propel them forward. So far that’s paid off to the tune of almost 70% … but I’m still in no hurry to buy any individual stocks.
It’s interesting to see what kind of selection process people use to make their choices though. I enjoy this kind of insight.
I think if investors work in, understand a particular industry, they have a small competitive advantage over most investors. Could still things go wrong? Absolutely because you’re still picking stocks and favourites.
I liked Rob’s post from the same perspective – what others use for their selection process and why it works or what they’ve learned from it – it can help others.
When I recall the detailed work I used to do while looking for undervalued stocks, the analysis described here seems like far, far less. I concluded that I wasn’t doing enough work to uncover potential problems with stocks. I wish him well, but I’m not optimistic about Rob L.’s long-term returns.
Rob’s strategy is a bit risky for sure Michael. I have owned a few high-yielding stocks myself and have been both rewarded but also burned (see TransAlta). This is part of the reason why I’m going to be indexing more in 2015; I’m realizing while dividends are good from individual stocks; there are no guarantees except for market returns less miniscule money management fees via indexing.
Rob likely does more research than this, hopefully he can comment and share some details.
You bring up a good point but the reality is for most people they wont’ go to that depth of research. Plus how much more can we learn by reading the annual statements of a big bank that we don’t already know. It’s one of the reasons why you stick to DRIP style stocks simple and easy to understand. But having said that there is one point I could have included.
Is the company issuing gazillions more stock?
It’s a clear warning sign and it’s one of things that should pop up when your researching the company. That kind of information is quite easy to find.
Also I’m working on a second guest post about my real life experience in buying high yield stocks. In this case Aberdeen Asia Pacific (FAP). The reason I first bought it, why I’m still holding on to it (dividend cut) and what my plans are know that they cut the dividend, i.e. lessons learned. High yield stocks have their place in a portfolio but their are certain rules you have to follow, such as asset allocation etc.
But I’m getting ahead of myself
Yes, I know that most people don’t do any meaningful research. This means they are just throwing darts. I can’t imagine buying any individual stock without reading all recent disclosures (including annual statements). Failing to do so is like buying a car based on its colour.
I hear what your saying but research doesn’t take into account fear and greed. Coke a perennial favorite of investors everywhere and hit almost $30 in 1998 before crashing to a low at one point of just above $14 It took almost 10 years to recover. Just in time for the GFC.
So what dividend yield does is tell you what stocks are cheap, but what it doesn’t tell you, is it a good deal or not.
That you have to research!
Research takes into account everything that could affect a stock. Reading all disclosures is just a start. Failing to read disclosures is gambling.