If you're a long-time reader of
StreetAuthority, you know by now that we rarely recommend stocks
with yields higher than 10%.
If the yield is higher than that, it's usually a sign that the
company's fundamentals are sagging, investors are bracing for a
dividend cut -- or worse...
But today, I'm going to show you how to break one of the
cardinal rules of safe income investing and buy a stock yielding
17% without losing a single night's sleep.
All you have to do is think more like a
. Now, I know that doesn't come easy to most income investors,
but it's easier than it sounds. In fact, I'm going to show you
how one simple tool allows you to know when it's safe to buy
stocks with ridiculously high yields, hold them for a period of
time and collect any dividends you might receive, and then know
when it's time to get out before the rest of the crowd loses
But it's one thing to tell you this. I want to prove it to you
with one of the most followed high-yield mortgage real estate
investment trusts (mREITs) of the past few years --
American Capital Agency (Nasdaq:
If you're the type of income investor that's always been
willing to take some risk to get double-digit yields, then you're
probably familiar with AGNC by now. You might have even owned
some shares at some point. Maybe you still do.
For the past five years, the trust has sported a monster
dividend yield ranging from 14% to over 20%.
AGNC buys debt issued by U.S. government entities such as
Ginnie Mae, Freddie Mac and Fannie Mae -- which means any
principal or interest payments are government-backed as well. The
majority of the trust (70%) is invested in 30-year, fixed-rate,
Despite the fact that many high-yield securities carry heavy
risk, this mREIT's efficient use of capital has allowed revenues
and profits to soar. From May 2008 to the end of 2012, the
company's annual revenue rose from $41 million to $1.44 billion.
And for much of that time, AGNC sported a return on equity (ROE)
around or above 20% -- meaning for every $1 invested by
shareholders, the trust managed to return 20 cents in the form of
Meanwhile, since the end of 2011, the trust has carried no
debt. Instead, it's nearly doubled its cash hoard to $3.3
billion. From AGNC's start in May 2008 until its peak in 2012,
shares gained 339%, including dividends.
Then, September 2012 came around... The stock hit an all-time
high near $37 per share at that point. And while the company was
still enjoying healthy profits at the time, (and has ever since),
the company's shares have tumbled dramatically.
Since its peak in September 2012,
the stock price has fallen 46%
, despite the broader market rising 25% over that period.
Fundamentals work fine up to a certain point.
But if you followed a few simple trading signals, you
would've known EXACTLY when to buy and sell this stock
, avoiding the excessive risk and unexpected stock dive.
To be more specific, I am talking about using "relative
If you've never heard of relative strength, don't worry. It's
simple to understand.
Relative strength is found by calculating the percentage price
change over the past six months for every stock and
exchange-traded fund (
). You then sort these changes from high to low and assign the
highest value a relative strength rank of 100 and the lowest
value a rank of zero.
Every stock is assigned a rank based on where it fits into
that range. I like to use 70 as the limit for buys and sells. If
relative strength is greater than 70 (meaning a stock is rising
more than 70% of the market), the stock or ETF is a buy. I sell
whenever the rank falls below 70.
You can see AGNC's relative strength charted below its price
in this graphic:
In this case, AGNC's relative strength fell below 70 on
September 21, 2012 (when the shares were still above $35),
meaning it was time to sell. It was a crystal-clear signal that
investors should get out.
That one signal could have saved an investor from losing
thousands of dollars. What's more, this signal got them out of an
underperforming stock during one of the best market rallies we've
ever seen -- allowing them to put money to work elsewhere.
So just to review, if you had followed this strategy and
waited to buy AGNC when relative strength was above 70 in May
2012 (capturing its 17% yield at the time), and held on to it
until September (when relative strength fell below 70), you
would've pocketed a total return of 17% just before the stock
took a downturn.
By contrast, investors who happened to buy the stock in May
2012 and didn't follow the signal to get out would be sitting on
a 11% loss right now. Even worse, if they bought near the peak
they'd have a 33% loss.
That's why I think using relative strength is the only way to
ever buy a high-yield stock -- or any stock -- safely.
All of this is proof that if you aren't using trading signals
in your investing, then you're missing one of the most important
tools to beat the market.
Of course, one example doesn't prove a system works.
That's why I want to tell you about a
special research project
I've completed that puts this tool to the test.
Using a few simple trading signals (like relative strength),
the system applies them to the stocks that are currently held
within the various StreetAuthority portfolios. These are the same
stocks held by Nathan Slaughter, Amy Calistri, Andy Obermueller
and other StreetAuthority experts... In other words, if you've
been a subscriber, you may be familiar with some of these
Once our expert stocks are considered, I rank every single
holding, top to bottom, filling a portfolio with up to 10 stocks
that rate the highest. The performance speaks for itself. During
a 10-year backtest from 2003 to 2013, the system showed a gain of
21.5% per year versus a roughly 7% annual rise in the
I call it the
, and it's perfect for income investors. Nearly two-thirds of the
stocks that I look at pay a dividend, and roughly one-third of
the stocks that are potential buys have a yield over 4%. And by
using trading signals and other fundamentals, my dividend payers
enjoy added protection that doesn't come with traditional
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