Highest Yield Stocks You Might Overlook
When you hear about the highest yield stocks, you usually hear about utility stocks.
Look…
I’m not saying there’s anything wrong with utility stocks.
The right utility stock is a great way to capture a high dividend. The wrong utility stock…
A world of hurt. And I’m going to show you one where there’s already been plenty of pain. And it’s going to get worse.
But first, let’s get a few numbers straight. What exactly is a high dividend stock?
We’re usually talking about the highest dividend stocks when it comes to yield.
The actual percentage you see with the yield. And you can’t figure what’s high until you can measure a yield that’s normal.
Through the first 10 weeks of 2015, yields looked like this.
The S&P 500 yield was 1.84%.
The S&P 500 Utility yield was 3.47%.
The FTSE Nareit, which tracks Real Estate investment Trusts, or REITs, was 3.35%.
And bonds… the Barclays U.S. Aggregate Bond Index was 2.1%.
These numbers give you good benchmarks to figure out what a high yield is. But keep this in mind.
The search for stocks with the highest dividend can send you staggering down a one-way street toward ruin.
I’m not kidding…
If you are focused on nothing but yield, if your approach is to take a look at a list of stocks and buy the ones with the highest yield, you’re setting yourself up for trouble.
It’s like buying a house because you love the landscaping, but the foundation is shifting, the plumbing is leaky, and the wiring shorts out every time you fire up the microwave.
So, there’s only one thing you need to do if you want to make money with dividend stocks…
Get High Yield Out Of Your Head
Stop drooling over big numbers.
The numbers don’t lie. And dividend investors usually get in trouble when they ignore some very simple arithmetic.
Yield is nothing more than dividing the total dividend payout by the stock price. That’s it.
And it means that when the price of the stock bumps around, so does the yield. When dividends stay the same and the stock price falls, the yield goes up.
This painfully simple arithmetic means that people who fall in love with high yield somehow ignore the plunge in a stock’s price.
Companies with a track record of paying growing dividends year after year usually don’t have wild swings in the price of the stock.
So where’s a good place to find high yield dividend stocks that are easy to overlook?
High Dividend Utility Stocks That Can Make You Money
What makes utility stocks so appealing to dividend investors? Why do they crank out a historically high yield?
They’re more or less legal monopolies. The business is stable and fairly predictable.
Now and then you’ll run into a nasty situation, like Trans Alta $TAC, a utility in Calgary, Alberta Canada.
It pays a 7.86% yield, twice what you’d expect from a utility stock.
The hitch is the company can’t afford to keep paying the dividend. The dividend payout ratio is 276.9%. This means Trans Alta is plowing almost three times as much into the dividend payment as it’s earning… something that clearly can’t last long.
Look at the downhill slide Trans Alta has been on…
Investors in this supposedly safe utility stock have been hit hard… a reminder that there are exceptions to the rule.
Utility stocks aren’t a sure thing. But fortunately, most utilities aren’t so reckless.
The big utility in New York, Consolidated Edison $ED, pays a 4.23% yield.
California’s PG&E Corp, $PGE, pays a 3.34% yield.
You can also buy a utility stock ETF….
Utilities Select Sector SPDR $XLU pays a yield of 3.12%.
Vanguard Utilities Index ETF $VPU pays a yield of 3.34%.
iShares US Utilities ETF $IDU pays a yield of 2.93%.
And if you’re not thrilled with the idea of these fairly safe dividend stocks, you can look at some opportunities in real estate…
High Dividend REITs That Can Make You Money
A good place to look for high dividend stocks that shelter you from a lot of risk is in real estate.
Real Estate Investment Trusts, known as REITs, are good for a high yield.
That’s because tax laws for REITs essentially force the REIT to pay back 90% of taxable income to shareholders.
But REITs come with risk. And one of the big question marks about a REIT is how it will perform when interest rates go up.
Here’s what we know from history.
When interest rates go up, REITs don’t do well.
As the Wall Street Journal put it, “Fed rate rise is a worry.”
But that’s not the only problem. There’s something else to worry about when it comes to REITs. They have been on a roll. Demand for REITs has been high. You’ll have a hard time finding a REIT on sale.
Dividend yields for REITs are all over the place. One of the highest… Newcastle Investment Corp. $NCT, pays a yield of 24.74%.
That’s 8 times the norm. Remember, the FTSE Nareit, the index that tracks Real Estate investment Trusts, or REITs, is at 3.35%.
Find The High Dividend Stocks You Might Overlook
Look at REITs and utilities for a high dividend stock that makes sense for your portfolio.
You’ll uncover some good possibilities.
Just stay away from the high dividend stocks with a yield of more than 10%.
Lower yields can be fine, especially when they grow, and give you the power of compounding.
That’s one of the dividend investing secrets not many people know.
High dividend stocks won’t always be your REITs and utilities.
You can look at different industries for a good, solid stock that focuses on growing the dividend over time. Consumer packaged goods is a good sector. So is insurance.
The bottom line…
The highest yield stocks aren’t always generating electricity. Cast your net far and wide to find the ones that will generate income.
Regards,
Michael Jennings
Dividend Stocks Research
Note: Michael Jennings writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Category: Dividend Stocks
