5 Tips For Finding Safe High-Yield Stocks
There are currently about 8,000 publicly-traded stocks on U.S. exchanges. Of those, about 4,000 currently pay a dividend of some kind.
Now, any knucklehead with a computer can generate a list of the market’s highest-yielding stocks in five minutes. But that’s no way to find a good investment. Investing is not as simple as buying anything with a double-digit yield.
As a matter of fact, I routinely warn my readers against blindly buying these super-aggressive yielders. Why? Because nine times out of 10, a stock yielding more than 15% is likely in big trouble.
That’s why today, I want to cover some of the basics for finding reliable, healthy dividend-paying stocks. And I’ll also explain why they are essential to building long-term wealth…
5 Tips To Help You Find High Yields
Every security I recommend to my High-Yield Investing premium readers is put through an analytical boot camp before I even consider mentioning it. I must be sure that a high yield isn’t a trap in disguise.
Generally speaking, we prefer to feature stocks that yield at least 5%. So that’s where we start the search. Then I run them through my “dividend optimizer” model to make sure they have all these key traits necessary for a steady and lasting income stream:
1. A long history of improving earnings. In general, the longer a firm has been profitable, the more likely it is to deliver steady returns in the coming years.
2. Consistent and growing dividend payments. I want to see steadily increasing dividends with no declines or missed payments.
3. Strong cash flows. Since you can’t pay dividends without cash, I need to find companies that are generating above average amounts of cash every year.
4. Strong projected growth. Growing firms are more likely to be able to boost their dividends in the future.
5. A sustainable payout ratio. Firms occasionally pay out 100% or more of their earnings to shareholders. They can’t do this for long without cutting their dividend. I avoid unsustainable dividend payouts.
This is just the beginning. We do a lot more analysis with our picks over at High-Yield Investing, but this should provide you with a framework that you can use on your own.
There’s much more that we’d like to see in a pick. For example, the only thing better than a generous dividend is a generous and growing dividend. And there’s only one way to consistently raise dividends: by growing cash flow. Any company that can do that year after year will create a near-miraculous pile of money for you.
For example, back in November of last year, I talked about one of my favorite holdings, Magellan Midstream Partners (NYSE: MMP).
This is a master limited partnership (MLP) that owns and operates thousands miles of energy pipelines as well as storage terminals all over the United States. Due to the company’s unique pass-through structure and nature of the business (which is largely fee-based), it’s one of the most reliable companies I’ve ever come across…
We’ve owned MMP in our portfolio since September 2005. Let that sink in for a second…
When we added it to our portfolio, MMP was trading for just a little less than $17 per share and it had a solid yield of 5.7%. But that’s not the real story here…
You see, since then Magellan has relentlessly increased its quarterly dividend 55 times — for a total increase of 290%.
Its most recent quarterly payment was $1.048. That gives anyone who bought the company back when we did a yield-on-cost of 24% on their original investment ($1.048 x 4 = $4.192; $4.192 / $17 purchase price = 24.6%.)
It’s no wonder then, that we’re sitting on a total return of 494% as I write this.
Why This Matters
If you think about it, it’s one of the few free lunches in investing: You can get better returns and lower risk just by purchasing dividend-paying stocks. So, if you want to keep your money out of long-term losers like T-bills or CDs and put it to work in tireless investments that will never stop paying you, then high-quality dividend stocks might be just for you.
You see, it’s not the specific level of yield that matters to me — although it’s a great feeling to pocket 10% a year in cash. What really counts is that the companies are actually paying them. Dividends are a sign of financial strength; of a real business making real profits.
Dividends require executives to use capital efficiently. Such practices send a clear message that management is treating shareholders right by paying them the profits they deserve as co-owners of the business. What’s more, a steady stream of dividends indicates that a company keeps straight books. You can hide a lot of bad news with tricky accounting, but you can’t fake dividends.
The dividend-payers that I recommend in my High-Yield Investing premium newsletter offer the most compelling risk-reward trade-off you can find. These securities provide a smooth ride while producing market-beating returns, instead of heart-stopping peaks and plunges. Bottom line, they are far less volatile.
Don’t get me wrong, though — these stocks don’t grow on trees. Finding a company like this by picking one out of a hat would be near impossible. But with the criteria I outlined above, you could find hidden gems with relative ease.
If you’re tired of settling for the paltry yields being offered by most stocks — and don’t want to take on a lot of risk, either — then my team and I are here to help. I urge you to check out my latest research report, which goes into more depth about some of my favorite picks and how to put them to work for you today. Go here to check it out now.