It’s human nature for new income investors to focus on yield. Many eventually learn that above average yields often carry an above average risk of a dividend cut, loss of invested capital or both. People involved in extreme sports/hobbies, such as base jumping, hang gliding and shark diving, do things to minimize risk and protect themselves. In much the same way those investing in high yield dividend stocks, can do certain things to increase their chance of success.
Evaluate High Yield Stocks Carefully
When a stock carries a high yield, there is an underlying reason. Here are some questions to consider to help you understand the stock:
Is the high yield a result of a sudden drop in price?
Is the high yield above the industry average?
Is the high yield above the stocks average?
Is the high yield a result of a widespread economic downturn?
Is the high yield a result of a company specific problem?
Be Honest In Your Evaluation
They say statistics can be used to prove anything. In the same vein, if you are determined to buy a stock, an analysis can be constructed to support the position. Instead of trying to find a reason to buy the stock, look for all the reasons NOT to buy the stock. Then weigh the positives against the negatives. Does the stock still look as appealing?
Start With List of Higher Quality Stocks
If you are looking for high yield, the temptation is to use a stock screen to search for yield and apply it to the entire universe of stocks. As this screen demonstrates, yield is easy to find. Add in growth and sustainability, then the list will dramatically shrink. Currently, I track 198 dividend growth stocks. The list is made up of Dividend Aristocrats, Achievers, Champions and few other dividend stocks for good measure. Below is a list of the stocks from my database yielding more than 5% and with 15 more years of consecutive dividend growth:
Investors Real Estate Trust (NYSE:IRET)
Yield: 7.7% | Years of Growth: 36
The REIT engages engages in the ownership and operation of income-producing real estate properties in the United States.
CenturyLink, Inc. (NYSE:CTL)
Yield: 6.9% | Years of Growth: 37
CTL acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 6.7 million customers and Internet service to 2.4 million customers in rural towns as well as larger cities such as Las Vegas.
National Retail Properties, Inc. (NYSE:NNN)
Yield: 6.1% | Years of Growth: 19
This REIT invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.
AT&T Inc. (NYSE:T)
Yield: 5.9% | Years of Growth: 27
AT&T Inc. provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
Buckeye Partners LP (NYSE:BPL)
Yield: 5.7% | Years of Growth: 15
BLP is one of the largest independent U.S. pipeline common carriers of refined petroleum products, with over 5,400 miles of pipeline.
Mercury General Corp. (NYSE:MCY)
Yield: 5.6% | Years of Growth: 23
Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Old Republic International (NYSE:ORI)
Yield: 5.4% | Years of Growth: 29
The company writes property and liability, mortgage guaranty, title and life, and disability insurance.
Vectren Corporation (NYSE:VVC)
Yield: 5.2% | Years of Growth: 51
Vectren Corp. delivers gas and/or electricity to more than one million utility customers in Indiana and Ohio, and offers other energy related products and services.
Realty Income Corp. (NYSE:O)
Yield: 5.1% | Years of Growth: 16
O is a real estate investment trust that owns a diversified portfolio of 2,339 retail properties as of Dec. 31, 2009.
The above yields aren’t nearly as eye-popping as those from the screen. You will notice the above list is heavy in REITs (interest rate risk), telecommunications (technology risk), financials (equity and interest rate risks), along with MLPs and utilities (slow growth). Ultimately, we want to determine if the yield is sustainable. If we go looking for high yield, we will find it, but it may not be what we really want.
Full Disclosure: Long CTL, UHT, NNN, T, O. See a list of all my income holdings here.