High-dividend yields entice investors who love income with the hope of choosing what to buy wisely.
The desire for high-dividend yields is common, but requires quality research to determine whether the payouts are sustainable. Income investing aficionados are vulnerable to becoming enamored with high-dividend yields that could cause share price plunges if the payouts are later cut to curb shrinking cash holdings.
One income investing veteran who seeks out high-dividend yields in real estate investment trusts (REITs) and master limited partnerships (MLPs) is Bryan Perry, who leads the Cash Machine, Premium Income, Hi-Tech Trader, Quick Income Trader and Instant Income Trader advisory services. The Cash Machine service focuses on income investing with a goal of recommending investments that pay a dividend yield of at least 10 percent and could produce an even higher total return by counting share-price gains.
Former Wall Street Professional Scouts for High-Dividend Yields
Perry, who formerly worked as a high-yield, junk bond broker at Bear Stearns and Lehman Brothers in the 1980s, said he has been hunting down high-dividend yields for three-plus decades.
“Trying to craft a portfolio that pays considerably higher than traditional investments is always a challenge, but I’ve been at this for 35 years,” Perry told me when I interviewed him recently at the Orlando MoneyShow.
Cash Machine is designed to reduce risk by offering a non-correlated portfolio with high-dividend yield and capital appreciation. Perry’s service offers a three-tiered approach that features an Aggressive High-Yield Portfolio focused on higher-risk investments that pay 10-20 percent yields; a Conservative High-Yield Portfolio aimed at lower-risk investments that pay dividend yields of 5-10 percent; and a Safe Haven Portfolio with the least risky investments that pay consistent yields of 3-5 percent.
Invest in Real Estate Without Paying Commissions of 6 Percent
REITs allow people to invest in real estate with the click of a computer mouse. By investing directly in a REIT, investors gain professional management and a “basket” of various properties that can include apartments, shopping centers, industrial sites, public storage units and cell phone towers, Perry told me during my interview with him.
The buying and selling of REITs allow an investor to avoid paying commissions of 6 percent in traditional property transactions, Perry said. The ease of entering and leaving real estate investments could appeal to people who had a bad experience with real estate holdings during the 2008-2009 crash, Perry said.
“In this kind of a market where the economic outlook is a little bit slower,” and interest rates are largely neutralized, specialty REITs are attractive, Perry said.
REITs offer a “wonderful” form of income, Perry said. However, the payments received by the REIT shareholders are taxed as ordinary income.
Choosing REITs with Sustainable High-Dividend Yields Is a Skill
“Income investing is more about selectivity than usual right now,” said Hilary Kramer, a Wall Street money manager who leads the Value Authority, GameChangers, Turbo Trader , High Octane Trader and Inner Circle advisory services for individual investors. “REITs, in particular, have come a long way from a year ago, when you practically couldn’t throw a dart at the sector without hitting a 4 percent dividend. Yields have come down substantially, largely because the rate pressure that was keeping these stocks depressed has evaporated.
“Is it worthwhile to lock in 3 percent a year? Not really. That’s barely what Treasury yields pay and it’s only a little ahead of inflation. At that level, you’re really banking on the stocks themselves climbing in order to make real money. With the sector as a whole at a record level like the rest of the market, that’s a big leap of faith unless you’re in the right stocks.”
Several stocks in the REIT sector offer a yield of 10 percent, or even 12 percent or more, which would be great if it is able to go on forever, Kramer said. But it takes specialized expertise to separate the REITs that have the cash flow to keep paying those dividends, she added.
Sooner or later, those big dividend payers often admit they can’t strain the balance sheet any further and cut their payout to bring the yield down to something more realistic, while “leaving shareholders holding the bag,” Kramer said.
Master Limited Partnerships Offer Tax Breaks, High-Dividend Yields
Master limited partnerships (MLPs) pay tax-advantaged distributions rather than the ordinary dividends offered through REITs. The MLP profits are paid directly to the limited partners who participate in the cash flow of the company, Perry said.
The limited partners also benefit from the depreciation of capital expenditures to provide an additional tax advantage from the investment, Perry continued. Industries that tend to be fertile ground for MLPs include oil and gas, shipping, marine terminals and renewable energy, he added.
The MLPs can pay 6-10 percent dividend yields and also offer an alternative to tax-free bonds that do not match those yields, Perry said.
Cloud Companies Offer Growth Potential
“Professional money has turned its attention to a specific number of sectors and a specific set of stocks that are showing strong relative strength in an otherwise very choppy investing landscape,” Perry told me.
Possibly the most “resilient growth sector” right now consists of cloud-based subscription model software companies that help various industries become more efficient, productive and profitable, Perry said. Hot stocks within that arena include Microsoft (NASDAQ:MSFT), Adobe Systems (NASDAQ:ADBE), Autodesk Inc. (NASDAQ:ADSK), Intuit Inc. (NASDAQ:INTU), Workday Inc. (NASDAQ:WDAY), Twilio Inc. (NYSE:TWLO) and Zendesk Inc. (NYSE:ZEN), he added.
Chart courtesy of StockCharts.com
Also worth considering are cyber security software stocks led by CyberArk Software Ltd. (NASDAQ:CYBR), Palo Alto Networks (NYSE:PANW), Zscaler Inc. (NASDAQ:ZS) and Fortinet Inc. (NASDAQ:FTNT), Perry said. Certain industrial stocks also are “very healthy performers” in the current market, Perry added. Among stocks in that category he advised investors to weigh are Honeywell (NYSE:HON), Ingersoll-Rand (NYSE:IR) and Harris Corp. (NYSE:HRS).
Utilities, Telecom Providers and Consumer Staples Companies Pay Dividends
“In a market where volatility is on the rise, it’s obvious the safety of utilities, telecom providers and consumer staples are a go-to strategy for many investors,” Perry said.
Power companies that Perry said he likes include Sempra Energy (NYSE:SRE), Entergy (NYSE:ETR), Consolidated Edison (NYSE:ED), Dominion Energy (NYSE:D), NextEra Energy (NYSE:NEE) and American Electric Power (NYSE:AEP).
Among consumer staples companies, Perry praised Kimberly Clark Corp (NYSE:KMB) and Proctor & Gamble (NYSE:PG) as “best in class.” Investors who favor cell tower REITs could turn to American Tower (NYSE:AMT) and Crown Castle International (NYSE:CCI) as the “star performers,” he added.
Two stocks that pay dividends and offer potential for capital appreciation are McDonalds (NYSE:MCD) and PepsiCo (NASDAQ:PEP), which Perry described as among “America’s favorite fast food and snack” companies.
For investors who seek income and a chance for share-price appreciation, REITs and MLPs are worthy of consideration. Other income payers that also can produce respectable returns with reduced risk compared to the rest of the market include established utilities, telecommunications providers and consumer goods suppliers that typically navigate challenging economic conditions well. With trade disputes and negotiations adding uncertainty, investors may find comfort by pursuing high-dividend yields with income-seeking market guides.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.