How much risk would you be willing to accept to collect 10% a year?
In today's market, big yields are incredibly hard to come by. And big yields that are considered safe are near impossible...
But the truth is, if you don't have constant dividend payments flowing in or any other sources of income, it's very hard to compound your wealth over time.
I've talked about this before, but roughly 40% of the markets return over the past few decades have come from dividends... not price appreciation. Income is essential to anyone serious about growing their wealth. It's essential for making the most out of your retirement, too.
But where do you turn to collect income?
You can't turn to bonds... Not unless you want to lose money. The global bond market is in this strange twilight zone right now with about a third of the tradeable bonds in the world having negative yields. That's right... issuers of debt are paid to borrow.
But even bonds with positive yields will barely make you any money...
For example, the yield on the U.S. 10-year Treasury is only 1.8%. After accounting for inflation, you're not left with much...
The S&P 500's dividend yield is only 1.8%. Investment grade corporate bonds will only get you about 3%. And safe haven utility stocks will only earn you 3% as well. That won't excite you... And that won't grow your portfolio by much over time.
With not much yield in traditional income paying assets, you have to take on some risk if you want anything over 5%.
So how much is too much risk? Let's look at AMC Entertainment (AMC). AMC is a movie-theater operator that has about 1,000 theatres around the world. It has a near 10% dividend yield.
But due to the rise of streaming, the bears have been predicting the collapse of the movie theater business. AMC's stock has been killed as a result. It's down about 75% since the end of 2017.
Having a big dividend yield like AMC's doesn't matter if the stock loses three-quarters of its value. I think the negativity surrounding AMC is a touch overblown – at least for the short-term. Yes, movie theaters face headwinds over the next couple years, but over the next few months, AMC should be fine with some big blockbusters coming out later this year.
For long-term minded investors looking for yield, risky stocks like AMC are probably not the answer.
The key to finding big yields that are reasonably safe is to look where no one else is looking. Or to take advantage of special situations.
Consider company X. (I can't give the name away, out of fairness to my current paid subscribers.)
Company X is made up of three businesses that have no relation to one another, but are basic and essential services. It's a boring business.
But boring is better. These are profitable and steady businesses. They typically deal with long-term contracts, have low turnover with their customers, and have high barriers to entry. That means competition is limited. And these businesses produce a steady stream of cash.
It's a great stock if you're looking for steady income.
Now for the special situation...
A while back, the stock crashed 40% in one day. The company had just cut its dividend and investors were dumping shares as fast as they could. But we didn't just read the headlines, we dug more into the situation and found that it was an incredible buying opportunity.
In short, a number of this company's customers had to close up shop and stop doing business with company X. But it wasn't because they decided to find a cheaper competitor or didn't like the way company X treated them... It was because demand for their product declined. Production declined. So its customers were just done... It was unexpected and unlikely to happen again.
Company X had to find new customers with a different product to fill that void. That would take time and money.
The company could have come up with that money by taking on more debt, but if it did that it would lose its investment grade rating – which helped it borrow at an average of around 3.3%. Taking on more debt would also put the company in deep trouble if the credit cycle were to turn...
So it decided the best thing to do was cut its dividend. That didn't sit well with existing shareholders, but it was the responsible thing to do.
Since then, the company has slowly replaced the customers it lost without getting over levered. Shares have been pretty stable since the dividend cut, too. That means folks who bought shares after the dividend cut have been receiving 10% on their investment in dividend payments.
So not only should shareholders continue to collect the 10% yield, but the stock should also move higher as investors see the company replaces the customers it lost. There is obviously going to be risk with any investment, but we believe you won't find this kind of yield – with this amount of safety – anywhere else in today's market.
I recommended that subscribers of my Income Intelligence advisory buy shares of this stock in December and we're already up 20%. It's a must buy for anyone serious about collecting income. Existing subscribers can access our full write up of this company here.
We're also publishing our latest issue of Income Intelligence tomorrow where we'll be recommending another boring stock that yields 7.3%. Click here to become a subscriber today.
What We're Reading...
- The unstoppable surge in negative yields reaches $17 trillion.
- How to find yield in a low-rate world.
- Something different: Doctors warn of danger of 'feather duvet lung.'
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
November 20, 2019