Traditional income investors have been in despair for years now since the Fed adopted its zero interest rate policy and doesn’t appear to be changing course any time soon. Conventional safe investments like savings, CDs and money markets have continued to actually lose money to real inflation and will likely do so for years to come. Investors willing to take on some equity risk can be rewarded and protect themselves simultaneously by seeking out income instruments across various classifications as outlined below.
Foreign High Yielders
There are some interesting ADRs (American Depository Receipts) that trade on US exchanges that provide investors with numerous benefits: High Yields, Currency Hedging and Geographic Diversification. Let’s take a look at just one of these.
British American Tobacco (BTI) – This outfit, much like its American counterparts, provides a very high dividend yield (currently estimated at over 6%) because investors expect to be rewarded for the litigation risk that comes with this sector. A look at the historical dividend payouts shows that BTI pays out twice per year instead of the traditional 4 for US equities, and while the dividend amounts are somewhat volatile, the most recent payout in March 2011 was the biggest one on record, at $2.61 per share. That’s a positive trend, not to mention several years of no missed payments.
Aside from the high current yield, there are the other benefits cited above. If the US dollar declines further against other major currencies (note Britain is not on the Euro which is declining itself), then there’s some currency hedging in place there as BTI’s earnings are converted to US dollars down the road. Finally, there’s no reason to be 100% concentrated in the US, especially when the future is so uncertain with respect to regulation, taxes and overall malcontent over Wall Street, high unemployment and wage disparities.
See further explanation and other tickers that fall into this category for High Yielding Foreign Stocks.
High Yield ETFs
SDY is one of the more prominent dividend ETFs in the space and seeks to replicate returns from the S&P High Yield Dividend Aristocrats index. With a current yield of 3.2% compared to just 1.7% for the S&P500 (SPY) as a whole, there’s an obvious benefit over the broad index. For perspective, 10 Year Treasuries are now yielding less than 3% as well. So, you get broad diversification of holdings, a steady payout and a higher yield than other traditional holdings. Year-to-date, SDY matches the performance of SPY identically, at a 2.3% gain on the share price alone.
Persistent Dividend Payers
For investors seeking to “beat the street” and not leave returns to chance and broad market trends, there’s the option of picking individual stocks that are likely to return a mix of high yields and capital appreciation exceeding a broad market index or ETF. In selecting one of the two key dividend strategy approaches, we’ll look at a stock that is persistently increasing its dividend year after year: Piedmont Natural Gas Company, Inc. (PNY).
PNY has increased its dividend payout for over 30 years consistently. While the current yield may not seem overly high at 4%, it’s the steady increases in dividend payouts that investors have come to expect which drives the share prices up annually, keeping the payout in lockstep to maintain a steady yield. Over the past 5 years, PNY has beaten the S&P500 with a gain of 25% versus a flat SPY return over the same period (excluding the higher dividend yield to boot). While natural gas may not be your cup of tea given the energy complex in the US, there are other stocks that follow this trend as well just to get you thinking.
This is by no means a comprehensive list of all high yield investments available to investors, but it at gives a glimpse into the numerous options available outside the traditional “safe” means of investing – which aren’t really that safe when considering the gradual loss of value in real dollars over time.
Disclosure: No position in any investments covered in this article.