Rates are still low and even though we’re constantly warned about implications of a rise, I believe we just need to educate ourselves about how, why and for whom high yield exists.
“Chasing yield” is a phrase that pops up in many investment articles. There is a difference, for me, between those that “chase” and those that “seek”.
The desire for yield or to be fairly compensated for your investment should be there but if you’re taking on risk that you don’t understand, stop it. The high yield arena has diverse products and I would like you to know more about them.
Preferred Stocks – offer yield but it may not last. Please be aware of the call dates before you purchase and watch the price you pay.
High-Yield Bonds – buying in a recession can help. Always remember that they correlate with stocks so as the economy improves, these yields may fall.
Utilities – typically offer high payouts. Sector likely to be hurt with rising interest rates. Pay attention to the annual dividend.
REITs – real estate investment trusts vary in type. Mortgage ones can suffer with rising rates and equity ones can be judged on health of their dividend growth.
MLPs – master limited partnerships usually either harvest oil and gas or move them around. Energy prices matter and volatility is a given.
Not for Everyone
Each type of investment like those named above involve a unique set of risks. They all involve possible loss of principal.
Things to keep in mind:
Preferred stock: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock and does not have voting rights. Preferred stock subject to dividend suspension, interest rate risk, and low trading volume.
-High-yield bonds: High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
-Utilities: A category of stocks for utilities such as gas and power. The utilities sector contains companies such as electric, gas and water firms and integrated providers.
-Sector Investing: Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
-REITs: Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
-MLPs: A type of limited partnership that is publicly traded.
-The fast price swings of commodities will result in significant volatility in an investor’s holdings.