Mike Stathis

8 High-Yielding Stocks for Income Investors

This is a nice article and contributions by readers are equally good, While I am a big fan of high dividend yield common stocks during the current market conditions, I'd like to mention a few points. First of all, I think consideration of some of the big pharma names is worthy. Certainly they don’t offer the double-digit dividend yields of other stocks, but they are amongst the highest DYs for large stable companies.

PFE and BMY have been beaten down for years. And in my opinion, there is much more upside over the next several years than downside. They are currently yielding upwards of 6%. At the same time, they are solid at these valuations. PFE has an excellent 40-year history of dividend growth, while BMY is not quite as good, but still impressive. The main risk with the pharmas (and with all other traditional asset classes) is market risk or the risk of a market decline. Sure, there are some issues such as waning pipelines, but this has already been factored into these stocks. Thus, I feel the valuations present some nice appreciation potential once Medicare Part D kicks in with retiring boomers.

The second point I'd like to mention it's not that easy to find high dividend yield stocks that are safe. While the author makes note of companies that have and will always be around, "being around" as investment criteria is a dangerously low benchmark. A stock can cut its dividend by 50% or even 80% and the stock price could get hammered. This would not only devastate the expected dividend income but would also pummel the account value. In fact this is exactly what happened to some oil trusts a couple of years ago. Although we can never know what is ahead, one thing investors should do is look for increasing dividends during rising oil prices.

When researching for dividend-bearing stocks, first you should check the dividend growth. Next, you should consider are the merits of the industry and particular stock under consideration. I would consider the shipping stocks to be very risky and would not purchase them personally. Aircraft leasing is also quite risky unless you have been an investor for a long time and have a low cost basis. Understand that these companies, by necessity are involved with the financial system and could have some problems down the road.

Regardless how nice a stock may look, one should be extremely careful with any financial firm paying 15% dividends. Ask why the DY is so high. Is it due to the stock price getting sacked while the dividend has remained? Or is the dividend just that high? Regardless, I'd stay away from financials for a while, especially if you are seeking dividends.

I do think the oil trusts offer the best risk-reward. But I certainly would not overbuy. Regardless of your income needs, you should still have some stocks offering capital appreciation. Oil prices are volatile but oil trusts don't share the same volatility as the other types of oil stocks due to the high dividends. However, these trusts have thin trading volumes, making liquidity a potential issue. All this said, I think the oil trusts are excellent. Just don't buy too much because they are like any other stock - eventually they will have problems.

When interest rates soar (I expect this in a couple of years) stocks with high DY won't be as attractive to investors and this alone could knock the price down.

Always remember, if you think you can easily find stocks paying 15% DY that don't have high risk, you are wrong. A 15% investment return is outstanding, but you should never expect that to be sustainable over a long period. While it can and does happen, it defies market performance, as the average annual returns over 70-80 years have been 8% (capital appreciation + dividends). It simply defies the risk-reward dynamics within the market as well as the law of supply-demand which dictates stock prices. If stocks with 15% DY were viewed as low risk by investors, they would be purchased in masses, driving the share price up and the DY down. But this has not happened (not yet anyway). So be careful because the market is saying that these stocks are very risky. The market is not always right in the short-term, but over a longer timeframe it is. And if you are dealing with a short investment horizon such as that during retirement, you'll want to be careful.