Weekend Reading – High-Yield Stocks Are Not So Bad
Welcome to a new Weekend Reading edition – high-yield stocks are not so bad edition.
Before some details on that, a few reminders and some recent publications:
I shared some modest changes in how I intend to post all future monthly dividend income updates, and why.
I posted why most Canadians will never need $1.7 million to retire, despite what some think unless you’re a bigger spender…
I recently shared an investor profile who is Living The Dividend Dream, making nearly $100,000 per year USD in passive income. Incredible.
Weekend Reading – High-Yield Stocks Are Not So Bad
For the most part, consistently chasing yield is not a good idea. That approach is flawed with poor market timing, higher transcation costs and downright bad investing behaviour considering other investing alternatives.
So, are high-yield stocks a bad thing?
In fact, investing in such stocks as part of a responsible overall portfolio could make you very wealthy.
Don’t take my word for it. Follow the research.
Highlighting a recent article in The Globe & Mail (paywall), by expert Norm Rothery, some excerpts:
“If you read my recent exploration of the poor returns generated by stocks with extremely high yields, you might be surprised at the 13.7-per-cent average annual return of the high-yield portfolio.”
Why does buying and holding higher-yielding stocks, tend to work?
Good, stable, dividend paying companies are purchased at good valuations.
By default, in buying such companies with a higher yield each year via the BTSX strategy, you are seeking and buying value.
This is because of the relationship between dividend yield and stock price. Because yield is calculated as the dividend/stock price, as the stock price declines, your yield increases. So, via BTSX, you are essentially buying shares of large stable companies when their share price is (temporarily) depressed.
Norm’s research also highlighted something similar. From the article:
“The good returns are partly the result of a large number of solid dividend payers making up for a few dividend duds. Prof. French’s portfolios are also weighted by market capitalization, which means they invest more in large stocks than smaller stocks. As a result, the returns of the large stocks tend to dominate, which helps to weed out depressed stocks.
That is, stocks usually get extremely high yields after their share prices have fallen a great deal due to weak business results or worries about bad times to come. A falling share price directly pushes down a company’s market capitalization, which is calculated by multiplying its share price by the number of its shares outstanding.”
Weekend Reading – High-Yield Stocks Are Not So Bad, Right?
Of course not.
Yet a reminder that higher-yield stocks can signal trouble too, as in the inability to sustain the dividend or distribution to shareholders. Recent evidence of that, with mounting debt on the books, was Algonquin Power (AQN). This will not be the last company that cuts their dividend or distribution this year…it happens.
So, too much of an investing good thing is not always, well, not good!
Besides, on a practical note, investors should also consider growth.
I liken dividends and capital gains as part of total return as two sides of the same investing coin.
While both are great, it’s hard to get lots of each, there is usually a tradeoff:
- Either you get lots of dividends / distributions and little capital gains, OR
- You get more capital gains and less dividends / distributions.
A great visual reference below, honest 🙂
Dividends (and distributions) are therefore one very important part of an investor’s total return.
An investor could technically create their own dividend (income stream) by timing the sale of their stock shares. I’ve had that sentence on my Dividends page for 15 years now.
This may or may not appeal to some investors.
Ultimately total return matters to most.
Can you invest in higher-yield stocks with less risk?
There are a few Canadian index funds and exchange-traded funds that invest in high-yield stocks.
One I like in particular, is VDY (the Vanguard FTSE Canadian High Dividend Yield Index exchange-traded fund) but not without some caution.
This fund holds 50 Canadian dividend stocks (give or take) with above-average yields (based on expected dividends). The fund has an annual fee (or MER) of 0.22 per cent, which is quite good.
The income from VDY is very appealing but not without some concentration risk in Canadian banks. Here are the top-10 holdings at the time of this post:
Source: VDY/Vanguard Canada.
In looking at this image, you can likely appreciate now as Canadian big banks go, so will this fund. It will be up to you to decide whether that is wise long-term or not?!
Yet, it’s hard to ignore the historical results.
I compared a few of my favourite Canadian ETFs below so you can see how the past played out.
Rather impressive and aligned to Norm’s research.
Should an investor buy and hold higher-yielding stocks?
Depending on your investing risk, investing timeline and need for income, I personally don’t see a problem with part of your portfolio invested this way whatsoever.
Go for it as you wish!
As always, personal finance is personal.
Besides that mantra here on my site, I will offer up another one I’ve used:
the same things that could make you wealthy might be the same things that make you poor.
Like Norm, while some Canadian stocks with some generous yields have thrived over the past few decades (and I hope they continue to do so since I own some like Norm does) I would also anticipate some lows amongst the highs in any long-term investment strategy.
Buyers must remain aware.
What say you? Do you invest in higher-yield stocks? What’s your take on the investment risk vs. reward?
More Weekend Reading…
Like my friend Rob Carrick read this past week, I also read Mr. Tako’s blogpost entitled:
Related to my high-yield stock theme above, I liked Dale’s post on Cut The Crap Investing about owning a few defensive stocks in defensive sectors for any investing age but he also focused on retirement.
Are you still hoping for a massive crypto rally in your portfolio? Looking for crypto to go to the moon?
Well, let’s just share you won’t catch billionaire investor Charlie Munger ever owning any of that stuff.
Swearing below on national TV no less. He’s 99 folks. He can say what he wants 😉
— CNBC (@CNBC) February 15, 2023
I’ve written about cashflow being king a few times on my site over the years…so, how to make the most of your investments in retirement?
Read on: why a long-term, cash-flow driven approach to your retirement portfolio is key to success.
“The ongoing debate about an income approach versus a total-return approach continues, but in our mind it misses the point. Aftertax cash flow is most important—not necessarily how you achieve it. Specifically, retirees want to make sure they can generate enough cash flow to meet their short-term needs and any emergencies while preserving their capital base. It shouldn’t matter whether this cash flow is generated from an asset that delivers high levels of income or by reducing the capital of an asset. In both instances, the capital base remains broadly the same (a dividend reduces the price of the share by the amount of the dividend). This dynamic only changes when the tax treatment is different for income and capital.”
Our Life Financial is changing her blogging model. I look forward to staying in touch regardless. Here is her 2022 year-end update that’s worth a read for any investing inspiration in 2023 for you.
From her post, impressive:
Vibrant Dreamer included a worthy Canadian dividend income roundup for January 2023. This stuff always inspires me for this simple reason: there are so many investors saving and investing on their terms to financial freedom…
A reader recently asked me how long I’ve owned Telus stock. Here is part of that answer:
Save, Invest, Prosper!
Have a great weekend and thanks very much for your readership.