On average, they're yielding 7.2%. That's more than three times
theyield of the S&P 500. Try getting that amount from a
moneymarket orsavings account .
But that's not the half of it. In tandem with those high yields,
the capital gains have been great too. The average total return for
these 40 securities is 28.4%. The best performer has gained 192.6%,
yet still yields close to 4.0%.
This isn't the performance of some secretindex or an exclusive
hedge-fund's holdings. It's what is currently happening within the
portfolios of my
What's the secret to that sort of performance? And how can you
build a similar portfolio for yourself?
Don't get me wrong -- I do an enormous amount of research and
watch my holdings and the market like a hawk. But much of the good
fortune comes from sticking to a few simple rules that you can use
Over the years, these rules have proven their value inbull and
bear markets. The techniques are not complicated. Anyone can follow
them and potentially get the same results. So I wanted to share
with you, my fellow income investors, the four basic rules I follow
to build my winning
portfolios. I'm confident these tips can work for you as well:
Rule No. 1: Look for high yields off the beaten path
To find exceptional returns and yields, I frequently venture off
the beaten path. Some of the best yields I've found have come
fromasset classes few investors know about. A case in point is
Canadianreal estate investment trusts (REITs). These REITs
delivered exceptional yields this year (some as high as 12%), but
many stateside investors have never heard of them.
Other lesser-known securities I look at are exchange-tradedbonds
, master limited partnerships (MLPs) and income deposit securities.
All of these usually yield more than typical common stocks. In
addition, they can also be less volatile and hold up better during
If you're not familiar with these securities, then don't fret. I
have -- and will continue to -- cover them within
Rule No. 2: Consider alternatives to common stocks
It is a well-known fact that the vast majority of common stocks
simply don't yield much. The S&P 500's average yield is only
So when I can't find the income I want from common stocks I
like, I look elsewhere. My first stop is oftenpreferred shares of
the same company, which almost always yield more. Say you wanted to
General Electric (NYSE:
. GE's commonshares currently yield 3.2%, but you can find
preferred shares of GE yielding upwards of 6.5%. You still benefit
from the underlying company's backing, but with a much higher
Similarly, many companiesoffer exchange-traded bonds. While you
don't get actual ownership of the business as you would with common
stock, you will earn a much higher yield and have yourprincipal
backed by the underlying company.
Rule No. 3: Look for securities trading belowpar
Some of my highest returns have come from buying bonds when they
trade belowpar value . Par value is simply theface value assigned
to a stock orbond on the date it was issued. Most exchange-traded
bonds (which you can buy just like a share of stock) have a par
value of $25 per note.
But sometimes -- for instance, during a market panic --
investors indiscriminately dump these bonds, pushing their prices
down. By purchasing the bonds at a discount topar , you lock in
great opportunities for capital gains in addition to
A case in point was Delphi Financial Group 8% Senior Notes
(which have since been called). I purchased the notes in July 2009
for $19.27 -- a 23% discount to par value. During the 16 months I
held, I collected $3.00 per note in interest payments while the
shares rose to their $25 par value. In total, the notes returned
more than 45%.
Rule No. 4: Sell when it's time
This rule may seem the most obvious, but it is also the most
difficult to follow.
Like everyone else, I hate to admit I was wrong about an
investment. But I find it even harder to watch losses mount as a
pick falls further. That's why I'm not afraid to take a loss. I
swallowed my pride and closed out several positions for losses
during the lastbear market , and I'm glad I did. Continuing to hold
these would have greatly reduced returns on my portfolio.
Action to Take -- >
It may sound like a cliché, but knowing when to sell is just as
important as knowing when to buy. A wise investor knows when to cut
losses and move on to the next opportunity. If the security in
question is falling with the market, I may not be worried. But if
changes in the company's operationsmean it could see rocky times
ahead, I don't want any part of it.
-- Carla Pasternak
P.S. -- StreetAuthority's High-Yield Investing is dedicated to
bringing investors the highest-paying and most stable stocks, bonds
and funds on the market. Click here to learn how to profit from
some of our latest income investing picks, including the name and
ticker symbol of one company that has raised its dividends 205%
since going public...
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.