The New Normal For High Yields... And What You Can Do About It

Nathan Slaughter's picture

Tuesday, May 15, 2018 - 12:00am

by Nathan Slaughter

We get a lot of emails here at StreetAuthority... and we read every single one of them.

We don't have time to respond to all of them, but we try. A couple years ago, we started getting a rather persistent email from a subscriber to my High-Yield Investing newsletter.

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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...

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. But today they are exceedingly rare.

Let's start with bonds, which typically offer higher yields than equities. The current yield on the 10-year Treasury is 2.95%. If you're willing to tie up your money for longer, the 30-year "long bond" will get you a marginally better 3.12%.

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 2.60%.

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 historic lows near zero.

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.

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 1.87%. What about traditionally higher-paying sectors? The Utilities Select Sector SPDR ETF (NYSE: XLU) pays a yield of 3.5%. Banks won't get you there, either.

Out of curiosity, I just ran a simple stock screen. Out of 13,341 stocks and ADRs listed on U.S. exchanges, just 220 offer yields above 9%. And most are questionable companies that are 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 13,121 stocks don't make the 9% cutoff. If I restrict myself to that criterion, then I'm 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.

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, which is why High-Yield Investing is dedicated to stocks like Enterprise Product Partners (NYSE: EPD) -- which trades with a current 6.4% yield but has raised its dividend for 19 straight years. This tremendous growth has given us a total return of 173.9% since we added EPD to the portfolio, and means that we're now pulling in a yield on cost of 11.2%.

I don't know about you, but I'm far more comfortable owning a stock like this.

The numerous advantages of stocks with long-term benefits like these is why I've been telling readers of my High-Yield Investing newsletter about them for years...  -- a special group of stocks that have the best track record of delivering outstanding income and overall returns to investors. Not only do these investments protect wealth -- they grow it safely and steadily year after year.

I urge you to check them out now by clicking here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.