"Every advantage is temporary." ― Katerina Stoykova Klemer
This instablog post comes from Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on SeekingAlpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service is now over 5,400 active subscribers and can be had HERE for the rock bottom price of $49 for the first year.
By Tim Plaehn,
Earning a 12% yield every year, paid in cash, should be exactly what every retirement-focused investor should be looking for from their investments. Tim Plaehn follows this stock closely and shares exactly why it is a great fit for everyone looking for income.
One of the surprises and challenges for investors moving into high-yield stocks is the sometimes extreme volatility of share prices. An investor may think that the share price of a company which has paid steady, large dividends would be pretty stable. In reality, it is often high-yield stocks that are the most volatile in the income stock world.
As with all stock market investing, you can let a volatile stock cost you money, or you can set up strategies to use those share price swings to your advantage. One strategy will let you drive your average cost basis down so low, you will never worry about share price swings again.
Ship Finance International Limited (NYSE:SFL) is the poster child for steady dividends, but is also an example of a wild share price high-yield stock. Ship Finance buys ships of different types and leases them out to shipping companies. This is a sector where there are always some companies or a sub-sector falling into financial trouble.
Right now, it's the offshore drilling companies that are struggling in the face of lower oil prices. In spite of operating in a sector full of sinking ships -pun intended- Ship Finance has managed its business to be financially secure and to pay and attractive and growing dividend.
The stock market has moved the SFL share price as it reacts to the fears and greed from news out of the rest of the shipping industry. The result has been a share price that looks like this over the last five years:
Here is a strategy to securely earn that 12% dividend and (even) more over time. The first idea that new income stock investors must internalize is that to earn dividends, shares must be owned. If you want to earn that dividend then income shares must be purchased.
Once you own a stock, the share price could go up or go down. In the case of Ship Finance, the share price has swung between $12.07 and $16.28 over the last year. That's a 30% share price swing around the mid-point. If you own a stock that moves like SFL, you can panic when the share price falls and lose money. Your other choice is to buy additional shares when the price falls and then sell those added shares when the price recovers, generating short to intermediate term capital gains and additional dividends.
Here is a hypothetical example of how an investor could have boosted his/her returns in SFL over the last year.
• As an initial position 1,000 shares were purchased in April 2016 at $15.00 per share. A $15,000 investment.
• In July, the stock dropped below $14 and 200 shares were purchased. The stock price recovered and those shares were sold for $15.50 in mid-August. The result was a $300 profit. Now the cost basis for the initial $1,000 shares is $14,700.
• In the fall, the SFL share price collapsed again, dropping all the way into the low $12 range. Our intrepid investor bought it at $13 for another 200 shares. The share price again recovered and the added shares were again sold at $15.50, for a $400 gain. The 1,000-share basis is now $14,300 or $14.30 per share.
From this example, taking advantage of two price dips, the cost basis on the shares were reduced by 70 cents or 4.6%. Over the same period, the held shares earned at least $1,800 in dividends. If these trades are repeated over a period of years, the investor ends up owning SFL shares with a very low cost basis and those shares are generating significant dividend income. That is win-win, can't lose investing.
To do this type of cost basis management, you need to get a feel for the share price swings of the stock. In the case of SFL, a price below $13.50 is the time to add, and added shares should be sold at $15.50. These numbers need to be flexible as the market and the company's conditions change. If you work at it, you can become very adept at buying low and selling high -what all investors want to do and few can. All the while, you can earn an attractive dividend income stream at the same time.
"What luck has gave you will probably leave you." ― Amit Kalantri, Wealth of Words
I hope you enjoyed Tim's current take on this high yield play. Tomorrow we will revisit Neurocrine Biosciences (NASDAQ:NBIX) after its big FDA approval after the bell yesterday. We provided a positive investment case on this name in early February and it is time for an update it given this positive & predicted event.
Note: If you are not registered to receive the several free & detailed reports on biotech & biopharma stocks I put out every month via biotechfreereports.com, there is always times to do so. Just register HERE and all reports will then hit your "in" automatically as published.
Thank You and Happy Hunting
Disclosure: I am/we are long NBIX.