When Is A High Yield Too High? Here Are My Thoughts…

I get a lot of emails here at StreetAuthority… and I read every single one of them.

I don’t always have time to respond to all of them, but my staff and I make every effort to try within reason. A couple years ago, we started getting a rather persistent email from a subscriber to my High-Yield Investing newsletter.

Here’s what the subscriber wrote:

“The newsletter is called ‘High-Yield Investing!’ Stocks with 4% yields do not constitute high yield. Maybe ‘Conservative-Yield’ would be a more appropriate title. I am deeply disappointed… High Yields [start] at 9% minimum.” — H.W.

While I appreciate the feedback, the truth is I think this subscriber may not have been paying attention to what’s going on in the market.

My short answer: It’s not 1980 or 2009. But here is my long answer…

How High Are You Willing To Go?

I would love to be able to showcase high-quality, low-risk stocks and bonds with robust yields of 9% or better to my High-Yield Investing readers week in and week out. If I did, I would likely be writing to you from my own private island somewhere in a tropical paradise — because it would mean that I had access to a secret asset class that had eluded even the sharpest hedge fund managers.

Even assuming these 9% yielders had zero capital appreciation, we would have a pretty good chance of whipping the market, which averages somewhere around a 7% return historically. It’s not easy to beat the market, period, but it’s next to impossible to do so with income alone.

The fact is securities with 9% yields were commonplace after the 2008 crash. Heck, we even scooped up some bit yields in the wake of the Covid-19 selloff. But those times are rare…

Let’s start with bonds, which typically offer higher yields than equities. The current yield on the 10-year Treasury is 3.6%. If you’re willing to tie up your money for longer, the 30-year “long bond” will get you a meager 3.9%.

What if I accept lower credit quality and expand the search overseas? That won’t even get me to the “conservative” threshold of 4% H.W. mentioned. The iShares Global Corp Bond UCITS ETF Index has a current yield of 2.8%.

Keep in mind that all borrowers (from homeowners to corporations to sovereign foreign governments) pay rates based on the current yield environment and their own credit standing. And the benchmark federal funds rate, which influences other rates, is at about 5%.

Think back to what yields were like back in 1984, when even a 1-year bank CD paid 10.8%. If a 10-year risk-free loan to Uncle Sam paid 5%, then a AAA-rated blue-chip corporate borrower might have had to pay 7% or 8% to attract capital and a shakier company might have had to offer 10%.

But inflation was also running at double digits at the time. So while the nominal payouts appeared high, the real return (net of inflation) probably wasn’t much better than it is today. Now, it’s true that we’ve had our own problems with inflation recently. But everything else is playing catch-up. In any case, we can only take what the market gives. And right now, there are precious few bonds with 9% yields.

OK, so what about stocks? Well, the average member of the S&P 500 currently offers a dividend yield of 1.6%. I know, it’s ridiculous.

What about traditionally higher-paying sectors? The Utilities Select Sector SPDR ETF (NYSE: XLU) pays a yield of 3.2%. Banks won’t get you there, either.

Let’s Not Get Too Greedy

Out of curiosity, I just ran a simple stock screen back when I first got this question. Out of about 13,000 stocks and ADRs listed on U.S. exchanges, just over 200 offered yields above 9%. And most were questionable companies that were high-yielding for a reason: they’ve lost a considerable amount of value in terms of share price, causing the yield to spike.

That means we’re talking about thousands of stocks that don’t make the 9% cutoff. If we restrict ourselves to that criterion, then we’re automatically eliminating 99% of the pool of potential investment candidates. Needless to say, that includes the overwhelming majority of the market’s biggest winners.

All of this is to say that while I strive to hunt down and recommend attractive securities with double-digit yields — and own a few in my High-Yield Investing newsletter — they are the exception in this environment, not the rule.

Even Warren Buffett, the greatest investor of our time, has counseled investors to tone down unrealistic expectations. Here’s what he had to say:

“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent.”

Translation: We need to learn to be happy with a 9% annual total return, not expect it as a minimum yield.

Closing Thoughts

I don’t just invest in a stock based on a snapshot of what it looks like today. I look at its long-term potential. Think about it this way… If you had to choose between a new job that paid a $75,000 fixed annual salary with little chance of a pay raise or one that starts at $60,000, but with a 10% pay hike each year, which would you prefer?

Most of us would go with option B, knowing that our paychecks would rise to $66,000 in year two, hit $72,600 in year three, and then jump to nearly $80,000 the following year. Investors must typically make the same choice.

Look, I get it. We all want income, and we all want more of it. Right now, the average position in our portfolio yields 6.8%. I think that’s pretty good. Our portfolio is dedicated to income securities that run along a spectrum of risk. Sure, you’ll find some double-digit yielders in our portfolio… but you’ll also find steady eddies that may yield “only” 4% or so now — but have a track record of raising payouts year after year. And just because one of our positions yields less than that doesn’t mean it won’t turn out to be one of our biggest winners (it’s happened many, many times before).

I get why folks like H.W. are frustrated. It’s hard to find good yields in this market. But with a little patience, plus striking when opportunities arise, you can get there. And my staff and I are here to help you along the way. Go here to check out our latest research now.