With money market fund and savings account yields still pitifully low, it is very tempting to look for investments with higher yields. Indeed, the personal finance magazines know this all too well, dangling teasers on their covers like:
- Stocks That Pay 8% (Kiplinger’s Personal Finance, Oct 2008)
- How to Get 8% on Your Money (SmartMoney, Dec 2008)
- Grab These Bonds For 10% Yields (SmartMoney, Feb 2009)
- Stocks That Pay You 5% Or More (Kiplinger’s Personal Finance, Feb 2009)
I know that they need to attract casual readers to buy their issues off the crowded magazine rack, but I fear that these articles can hurt readers by focusing primarily on yields.
From tankers to pipelines to real estate stocks, we’ve uncovered the investments with the best yields.
Stock dividends and bond yields are certainly a very important component of return. But with such significantly higher yields, the real question should be why the yields are high, as there is definitely higher risk. If your investment spits out 5%, but the actual investment decreases in value by 5%, um… you don’t make any money. You would have made more money at a bank. And if it does worse…
“Earn 8% or More” becomes “Earn 8% or a LOT LESS”
I bring this up because I was just reading the June 2009 issue of Kiplinger’s with an article entitled (surprise!) Where to Find Top Yields. But as I read, they first meekly admit that their last “yieldfest” article missed the mark. So I found it, and did a little before-and-after comparsion:
In Earn 8% or More (July 2008), they wrote:
Shares of First Industrial Realty trust (FR), a national developer and operator of warehouses and light industrial buildings, more than doubled between November 2002 and November 2006 but have since fallen 33%, to $30, over concerns about flat rents and the firm’s high debt. The stock trades below First Industrial’s net asset value per share and pays 10%, one of the highest yields among long-established REITs. There is still ample cash flow to maintain dividends.
Pays 10% yield, ample cash flow, a long-established REIT. Almost sounds stodgy and safe. Fast forward to June 2009:
Credit-market chaos wreaked havoc with the recommendations in our previous “yieldfest”. Our best picks, emerging-markets bond funds such as Fidelity New Markets Income and Pimco Emerging Markets Bond, dropped about 10% over the past year through April 9. Pipeline stocks, such as Kinder Morgan Energy, also held up reasonably well. But we had our share of disasters. For example, First Industrial Realty Trust cratered by nearly 90%, while Genco Shipping & Trading dived 73%.
Their best picks still dropped 10%? Most were in the disaster category. Another pick from July 2008:
For example, look at First Trust Strategic High Income (symbol FHI), which borrows to invest in bank loans, mortgage-related securities and junk bonds. Its share price plunged from $20 in early 2007 to less than $10.50 eight months later, as its underlying assets fell victim to the credit crunch and the real estate recession. But the shares have rebounded to $12.25, and the fund’s net asset value per share, now $10.38, has stopped crumbling (unless otherwise noted, all figures are to May 12).
But even as the fund was collapsing, it kept paying out 16 cents a month. Based on the current share price, the payout (which doesn’t require borrowed money or represent a return of capital) comes to a yield of 15%. We generally don’t recommend closed-end funds selling at 18% premiums to NAV, but First Trust’s yield is too luscious to pass up.
From a share price of $12.25 at the time of recommendation, the share price of FHI as of 7/13/09 was $3.38. Including those “luscious” dividends, the 1-year total annualized return was -57.3%
They also neglected to mention the fact that FHI has management fees of 2.21% plus “other fees” of 2.11% for total annual expense ratio of 4.32%. Ouch.
Both of these are extreme examples, but an important lesson can be learned by reading the entire 2008 article first, and then reading the 2009 article. The story is always very convincing. You’ll get high yields, historical stability, and some sort of reason why things are looking up. It will be tempting. But remember, this part of your $5 magazine is selling sizzle, and won’t reimburse your losses when there’s no steak.
* p.s. Don’t get me wrong, I don’t think that these magazines are all bad. They often have very useful articles, which I read and link to regularly. I am a paying subscriber, after all. However, I do think that these “yieldfest” articles are written primarily to increase their own revenue, not the investment returns of their readers.
By Jonathan Ping | Investing | 7/14/09, 4:24am