It's tough to retire on a 2%.
Even riskier corporate and government yield.is currently paltry yields. Consider that Spanish 5- currently just 4.1% despite the fact that just six months ago, some were speculating the nation could be forced out of the euro or would need to its burden. That's a to ask for taking on all those risks for such a low
But while most investors might salivate at the prospect of a double-digit yield, smart investors should be cautious.
Let me explain...
Many investors equate dividends with safety. After all, some of the best dividend-paying market.are solid companies with a long operating history and consistent flows. And over the past decade, offering dividends have outperformed the broader
But, free lunch on . If a is paying a sky-high dividend yield, it's often because investors expect the firm to cut its payout. Many of the highest-yielding are cyclical and exposed to risks such as an economic slowdown or a slump in prices.offering 10% yields and higher in the current low-yield environment are often downright speculative. There's no
Raymond F. DeVoe, a widely read economist for Legg Mason, once noted that more has been lost reaching for yield than at the point of a gun.
Based on the experience of the past indicated yield over 10%. One later, these had risen an average of just 4.5% in a when the S&P 500 was up over 16% and the Bloomberg Europe 500 was up nearly 20% in dollar terms., he's absolutely correct. At the end of 2011, there were a total of 11 in the combined universe of the S&P 500 and Bloomberg Europe 500 indexes with an
That's not to say investors can't makefrom offering strong yields. It's simply a matter of being selective and paying attention to macroeconomic and industry-specific that might prompt a to cut its payout.
But it's also important to consider other factors besides just a company's yield. Specifically, some of the best-performing are those that a single-digit yield and boast a history of consistently boosting their payouts to shareholders.
Just look at Procter & Gamble (NYSE: PG). Its dividend yield has stayed below 3% for much of the past decade, even though it's raised its dividend payment by 173% -- from $0.21 per share to $0.56 per share -- over that time. With the company boosting its dividend payment 10 times in the past 10 , you'd think its dividend yield would be much higher than it's been.
But because every time the company has increased its dividend, investors have jumped to buy more of the gains from holding on to a dividend-growing like this -- if you invested in P&G 10 ago, you'd be sitting on a total return of 121%. And thanks to the dividend raises, you'd also be collecting an of 6.6% on your original investment., driving up the price and keeping the dividend yield low as a result. The of course is the healthy
Compare that to Frontier Communications (Nasdaq: FTR). With a dividend yield of 10%, it's the second-highest yielder in the S&P 500. But because of its mixed reports over the past few , no dividend raises and two dividend cuts, investors haven't exactly flocked to the . If you had invested in Frontier 10 ago, your dividend payment would actually be 60% smaller now than it was ($0.25 per share to $0.10 per share), and your total return would amount to just 1% -- even with the large dividend yield.
That's exactly why you shouldn't blindly chase every high-yieldyou see.
This philosophy -- buying shares of solid companies that boost their payouts regularly -- is a cornerstone of my Top Ten newsletter. That's because this is one of the single best ways to make in the market -- and it doesn't take a rocket scientist to execute this strategy, either.
Simply find cash-rich companies with wide-moat business models paying decent yields, and let the rising payouts do the rest.