Looking for a Yield? Always Consider the Downside.

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By Martin Tillier

Yield is a problem.

It seems like everybody these days is playing "hunt the yield." If you have ever wondered what apoplexy looks like, try mentioning CDs in polite company. Part of the reason is record low bond yields, as I discussed here. Additionally, as the first wave of baby boomers retires, there is increased demand for income-producing investments, pushing interest rates ever lower. People are getting desperate, and desperate people aren’t always rational. As an advisor I saw this frequently. It leads to a condition that I refer to as "yield blindness," whereby an investor sees only the juicy payout, without regard to the risk.

There are several ways of managing risk, but as I have said before, suitably placed stop-loss orders are the most effective, and easiest, way to achieve it. When I look for high-yielding stocks, I compare the yield to where I will set my stop. There is no point buying something with a 10% dividend payout and taking a 20% loss on the trade. This may seem obvious, but it bears repeating. To illustrate the thinking, we can look at two stocks that I think are worth considering at current levels.

Costamare Inc. (CMRE):

Costamare is a shipping company. They own and lease container ships on multi-year leases. The stock currently has a dividend yield of around 8.8%.

The VectorVest chart above covers the last 3 months. You can see that the stock has been volatile, but has traded in a range that could be loosely defined as $12.60-$14.50. As I write, it is trading around $13.00. VectorVest’s usually reliable proprietary indicators are mixed, leading to an overall “hold” recommendation. The YSG-Vector, however, which measures dividend yield, safety and growth is in the “very good” range. The negatives they see are mainly related to the volatility of the stock. At these levels you could protect yourself against a break out with a stop at around the $12.20 level, 6% away from the current price. Of course it would take you a year to collect your 8.8% yield and a volatile stock such as CMRE could hit your 6% stop level in a day, but recent price action would suggest that a move back towards $14 is more likely. Remember, this is not an investment where you are looking for an explosion in price. If the bottom end of the range holds, you are getting a decent return.

VOC Energy Trust (VOC)

 

Energy trusts, such as VOC, are entities that distribute a share of the profits from established oil and gas wells. Payouts are variable, mainly due to fluctuations in the price of the oil and gas they produce, so they are not for somebody seeking steady income. VOC is currently yielding just under 15%, and once again the current pricing gives an opportunity for some protection. A stop-loss around 10% away from the current level would protect against a breakout below the recent low of $16.55 and, barring a collapse in energy prices, a move back up towards the $20-22 level would seem more likely.

Both of the above offer an opportunity to buy high-yielding securities, while protecting yourself against losses that exceed your anticipated return. Neither are necessarily long-term holdings. In the case of VOC particularly, the price will decline over time as the wells become less productive. With some protection, though, they may both offer a decent return over the medium term. If nothing else, you won’t be the one at the party complaining about getting 2% on a CD.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks , Commodities , Investing Ideas

Referenced Stocks: CMRE , VOC

Martin Tillier


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