Years of doing research, reading academic studies and working on portfolios (including mine) brought me to this set of rules that enables me to simplify my investing process. Principle 1 – High Yield doesn’t Equal High Return: always remember that there is no free lunch in finance. A 5+% yield is often a red flag in a company!
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Verbatim00:01 Mike Heroux: Hey, fellow investors. This is Mike Heroux from Dividend Stocks Rock. Welcome to this part one of a seven-part series about my seven dividend investing principles. Throughout the years, I’ve spent lots of time doing research, reading academic studies, working on my own portfolio, checking out on my client’s portfolio as well, and then I came out with this set of rules that enables me to simplify my investing process, and hopefully make good returns over the next few years. The seven investing principle has been created at the same time as I created Dividend Stocks Rock back in 2013, and I wanna present them to you. So the first one is, High Dividend Yield Doesn’t Equal High Returns. When I started dividend investing over a decade ago, a lot of the investors were just telling that they would discard all the low dividend yield stocks. So for example, a company like Disney that pays between 1% to 1.5% dividend yield would not fit in a classic dividend portfolio. Main reason is being, most investors are seeking income from those dividends stocks and 1% to even 3% yield seems very low.
01:25 MH: On the opposite side, when you look at high dividend yield, I’m talking about stocks being over 5%, keep in mind that there’s no free lunch in finance, therefore, if a company must pay a 6%, 7%, 8% dividend yield or even sometimes double digit, it’s probably that something is wrong with the company. In other word, the company may suck. Why is that? Well, clearly, the market doesn’t believe in the business because the yield is basically the dividend payment divided by the stock price. So if you’ll look at many high yielders, they will show a stock price that is going down year after year. The business is not growing, they have difficult challenges, competitors may be technology. And sometimes the market catch that before there’s a dividend cut and start selling because they don’t wanna have this burden in their portfolio, and this is why the stock is left to pay a high yield.
02:32 MH: So the first red flag that goes on when you’re looking at potential dividend cut is definitely a high dividend yield. Second thing is, most high dividend yield stocks show weak growth perspective. You will have some sectors like REEDS for example, or NLPs, that will allow investors to rely on a safe dividend payment and a high one and 5% and up. And the dividend will still be safe. So it’s overall a good thing if you’re an income-seeking investor, but don’t expect much growth coming out from the stock. Most of the time, those companies shows a very stable price and then you get most of your total return coming from the dividend payment. I mean, this is not a bad thing, but keep in mind that if the dividend doesn’t increase year after year, your payment are getting eaten alive by inflation. So you have to be careful about that. And the second thing is, if the market goes up by 10% or 15%, and your stock just stagnate, the stock price just stagnates, then you’re kinda losing momentum and all you’re left with is the dividend payment. So you have to make sure that those are safe.
03:55 MH: After several years managing portfolio at DSR, I was a bit reluctant to create a high-yield portfolio. It took me a lot of time because most stocks that I’ve looked at that were showing a 5% plus yield always showed either higher risk or things that I didn’t like, and definitely, lack of growth vectors. So in 2018, I came out with a compromise between stock appreciation and dividend growth perspective that will allow me to select stocks paying between 4% and 5% and build a retirement portfolio offering a 4.5% to 5% yield plus a decent dividend growth model. This means that year after year, your dividend income will increase and keep up with inflation and at the same time, receiving a 5% yield on your investment is probably more than enough to live off your portfolio and enjoy retirement. So if you wanna learn more about this retirement portfolio, just click on the link below in the description if you wanna know about the six other dividend investing principles. This is a series that will be published one video per week for the next seven weeks. Subscribe to the YouTube channel and then you’ll be notified each time I upload a video. So if you have any questions, hit the comment section and let me know what you think about high yielding stocks. Since then, cheers.