Why Hold High Yield Stocks

High Yield StocksHigh yield investments can play a part in your portfolio. Even though I am a fan of the 10/10 rule of investing which focuses on the growth of a dividend stock,a high yield dividend stock (or income trust) can have a part in a portfolio. In fact, I have high yield investments in my portfolio.

What are High Yield Stocks

Let’s start by defining what a high yield investment is.

What it isn’t

  • It doesn’t meant that you chase investments based on yield.
  • It doesn’t mean you take risks with unworthy high yield investment (think of Yellow Pages here – I once had it on my watch list … shame on me).
  • It doesn’t mean you ignore fundamentals.

What it is – For me anyways 🙂

  • The yield is above average and sustainable.
  • The payout ratio will tend to be high which will limit growth appreciation.
  • The business is usually stable such as real estate.
  • The fundamentals are solid like other growth investments.

In the end, if you want to simplify the concept, it’s a stock (or income trust) that focuses on paying back the investors more than it focuses on growth. Dividend increases are usually limited and the price of the stock doesn’t move much under normal market condition. A stock with a dividend yield above 6% will tend to fall in my high yield investment pattern such as Liquor Store (TSE:LIQ).

Avoid falling for really high yield stocks as it is usually a sign of trouble. I would say that a yield above 8% should be really scrutinized especially if it’s a corporation as opposed to an income trust.

Why Hold a High Yield Stocks

In one simple word; DIVERSIFICATION. Again, it’s important to not just pick any high yield stocks. I find that REITs (Real Estate Income Trusts) fit the bill of a high yield investments. It’s usually a really good source of monthly income and at their price range, it’s usually easier to DRIP. The usually lower price of a REIT also leads to a better compound growth.

Based on your age, you may want to decide on a ratio in your dividend holdings:

  • Dividend Aristocrats – 5 years of dividend increase in Canada and 25 years in the U.S. See the dividend aristocrats for a list.
  • Growth & Dividends – Usually a yield between 2%-3%, a lower payout ratio and a strong track record of dividend increase. Canadian National Railway is an example.
  • High Yield Investments – REITs fit the bill but some stocks such as LIQ.TO or CPG.TO also fall into that category. The stock appreciation is usually minimal since more money is pack back to investors in the form of dividends.

As an after thought, I realized that I currently have a mix of those investments. It was a natural selection in trying to diversify my portfolio and it’s a result that I am quite happy with. I have a couple of REITs and some investments such as TSE:LIQ and TSE:CPG that pay high yields but I am otherwise focused on Aristocrats and looking at adding more “growth & dividend” stocks that fit the 10/10 rule.

Readers: Do you hold high yield investments? Which ones and why?

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7 Responses to "Why Hold High Yield Stocks"

  1. My high yield investment is most likely to be REITs, but I do look at corporations. CHR.B has such a high yield that it looks like you could be before the ex dividend date and sell soon after and come out up a lot. I like it because for the most part there is more short term certainty. But with a very long timeline I avoid high yield investments for the most part to achieve a lot of capital appreciation and dividend growth, which will serve me better than a few percentage points on yield right now.

  2. stock’s dividend yield is the percentage of a stock’s price per share that it distributes in dividends. A higher dividend yield means you will receive a higher dividend payment in relation to the stock’s price per share.

  3. I know it goes against the buy and hold mantra, but if I was you I would lighten up on banks, maybe sell 50% to 75% of them now, wait for the market correction that is most likely coming and then buy back into them at the low. Financials, energy and materials are going down last half of 2012 unless there’s a major stimulus coming, and even that I don’t think will stop Greece from leaving the Eurozone, which is going to kill Financials.

    1. The Passive Income Earner · Edit

      I am ok owning the banks amid their slow growth right now. They have a nice yields. I do however rebalance where appropriate and I have been looking at shifting some money from one bank to a US investment in my RRSP.

  4. To tell you the truth, i never knew about stocks and yields and dividends until I came to this site. I was just researching on Google and boy the information here is huge! Thanks for maintaining this site

  5. I find that a collection of high yield, value/growth, div growth is practical as I am approaching retirement (2 years out). Once I am retired, I will depend more on dividend yield, than dividend growth but I will still hold all three types to diversify my portfolio. I am depending on company pension, CPP, and dividends to support my retirement.


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