They say you're supposed to split your savings based on how old
you are.
So if you are 65-years-old, 65% of your savings should be in
safe investments liketreasuries ,bonds or asavings account .
But that rule isn't working anymore.
Let me explain...
Theyield on the S&P 500 is a paltry 2.1% even though large
U.S. companies are sitting on a record net cash position
andearnings are at or near all-time highs.
Meanwhile, the U.S. Federal Reserve has pushed its foot firmly
onto theeconomy 's accelerator, lowering short-term interest rates
to near 0% and embarking on two rounds of quantitative easing to
push down long-term rates, with a third round right around the
corner.
While ultra-low rates may have made it cheap for qualified
borrowers to borrow money, they're also punishing savers. Yields on
most savings accounts and certificates of deposit are well below
1%, and the picture isn't much better overseas. Yields on
government bonds in the UK, France, Germany and the Netherlands
continue to hover near record lows.
Against that backdrop, it's no wonder investors are eager to
pick upshares of companiesoffering high yields, and many see high
dividends as a sign of a company's safety and stability.
But buyer beware:
Investors who simply search for companies offering the highest
dividend yields are taking on far more risk than they might
imagine.
Consider that back in 2007, a screen for U.S. stocks offering
the highest potential yields would have revealed a number of
financials andmortgage real estate investment trusts (M-REITs )
offering payouts well into the double-digits. Many of these
companies have since slashed their payouts, filed for bankruptcy or
no longer exist as independent firms.
You see,dividend yield is calculated by dividing a company's
annualdividend per share by its price per share. That means there
are two ways a stock's dividend yield can rise: the price of the
stock falls or the annualized dividend rises.
Many of the M-REITs and banks that made the list of high-yield
stocks in late 2007 and early 2008 fit into the "falling stock"
category.
In most cases, these companies' shares fell before they cut
their dividend, as investors sensed trouble and bailed out of the
group. In effect, these companies had high yields for the wrong
reason.
Jumping forward to today, and you can find a handful of
companies thatoffer high yields for the right reason. These firms
have a long history of raising their payouts each year.
Many businesses are able to raise their dividends in a strong
economic environment, but only the most consistent companies are
able to boost their payout straight through economic downturns.
While there are certainly some quality companies offering yields
of 8% to 10% or higher, many shaky companies pay higher yields
because investors are pricing in a significant risk of a dividend
cut.
And nothing brings an income stock crashing to Earth faster than
a major payout cut. One of the most effective ways tospot a
sustainable dividend and to avoid the high-yield, high-risk traps
is to look for firms that have consistently raised their dividends
over the long term.
With these points in mind, and since I focus on international
companies in my
High-Yield International
newsletter, I searched for international stocks trading as ADRs on
U.S. exchanges, looking for stocks offering a dividend yield of
4.5% or higher that have boosted their payout at a 7% annual pace
or better over the past five years.
This five-year period includes the severe economic downturn of
2007 to 2009; any company that continued to boost dividends through
that period must have abusiness model that is reasonably resistant
to economic cycles. I further eliminated firms that show high
dividend growth solely because of a one-offspecial dividend .
To weed out companies showing a high yield due to significant
price declines, I eliminated any stock that has not returned at
least 7.5% so far in 2012, including dividends.
Here are the results:
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Risks to Consider:
Some of these companies in this list are not going to be as
good as others. A number of catalysts could effect these companies
negatively. You should research each stock individually to ensure
it's the right investment for you.
Action to Take -->
I personally like
National Grid (NYSE:
NGG
)
and
SSE (
SSEZY
)
. Both are solid utility companies that have consistently increased
dividends. Their ability to manage through tough years like
2007-2008 proves the value of their diversified business mix and
makes the stock a solid buy.
-- Paul Tracy
P.S. -- If you're tired of settling for paltry yields on U.S.
Treasuries, you don't have to settle for the limited world of U.S.
stocks to get the income you need. I've put together a special
report that explains how you can find some of the highest -- and
safest -- yields in the world. Go here to learn more.
Paul Tracy 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.