Dangerous Personal Finance Magazine Headlines: The Attraction of High Yields

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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.

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  1. You are being too nice to the PF mags my friend. I went after Kiplinger hardcore in my post yesterday for their crappy content.

    Whether it’s a small blog or a big mag most people always forget about risk. Thanks for pointing it out.

  2. Jonathan,

    Your post is right on the money. Magazines tout strategies about high yielding stocks because that could sell more copies. Given the fact that the staying power of the average investor is only a couple of years, it is no surprise that these publishers are still in business.

    I am often criticized for not writing about the highest dividend stocks. To me high yield = high risk = risk of dividend cut. What good is a 12% yielding stock, if there is a huge chance your dividend payment will be cut by 90%?

    I believe that aspiring dividend investors should learn about yield on cost, and only then go on with what they are doing..

    Great Article!

    Dividend Growth Investor

  3. Gretchen says

    Thanks for this post. I always wonder how these things fare a year out. It is great to have someone go back and do the research for me and then outline it well.

  4. I came to a similar conclusion about 3 years back when Kiplinger’s recommended Thornburg Mortgage–just before they became one of the first victims of the housing meltdown. Their pattern at that time was to recommend financials, real estate, and high dividend stocks–exactly the stuff that crashed the hardest.

    Kiplinger’s wouldn’t exist without ads from financial companies and so they act as a surrogate salesman for those products. They effectively collect a commission from both magazine buyers and investment firms–and then just recommend the same old junk. It’s a lot cheaper to buy a $5 magazine than directly pay a full-service broker, but in the end you’ll get the same benefit (nothing).

    Stick with a Lazy Portfolio and Vanguard funds.

  5. “Including those “luscious” dividends, the 1-year total annualized return was -57.3%”

    …IF you sold the stock. If not, then the article isn’t quite as misleading, since you got your big yield minus the fees.

    That said, I dropped my Kiplinger’s subscription at the end of 2007. Heh. I still reflect back on the late 90s when Money Magazine labeled Enron and Worldcom as “must have stocks for the next 20 years.”

  6. I gave up on Kiplinger a long time ago

  7. JimmyDaGeek says

    Yeah look ACAS did to me ;(

  8. JimmyDaGeek – Hey, I owned ACAS for a few days in my Zecco “play money” account… I was going to wait for one dividend payment but decided against it. I know because I had to recently fill out my Schedule D.

  9. Wonder how many investment names appear in articles thanks to a small “contribution” to either the author or the magazine.

  10. Don’t get me started on these magazine articles. Always exciting and sensational. This should be a requirement: whoever writes the article must do whatever the article recommends. I tell you they will learn really fast.

  11. I’ve got to take the other side on your REIT and pipeline post. These securities enjoy special tax treatment that allows them to avoid paying corporate level taxes if they pass through most of their earnings as dividends. These usually have higher than average yields, becuase taxes are not deducted before distribution and are not necessarily signs of ‘trouble’. In addition to price multiples (‘funds from operations’ for REITS or cash flow multiples for pipes) yield spreads versus Treasury bonds are a source of valuation. Tax treatment of dividends received by the investor depends on the structure of the dividend payor and receiver, but the investor base has traditionally been retail investors because of legal restrictions kept institutions away, and this has resulted in an shallower/illiquid market and debatably less-sophisticated investor base that results in unpredictable (some might say irrational) valuations. I’m not defending the magazines – I manage investments for a living and avoid those as a rule – but I can’t let you trash these structures by cherry picking the most overlevered and poorly managed of the lot as examples for all. I could find a stock that went bankrupt lately – some even in the Dow Jones and S&P indices – but that doesn’t mean no one should invest in equities.

  12. Masterpiece!

  13. …and one more thing:
    In the financial world everyone is trying to sell me a product or service (money management, portfolio/wealth management, tax services, brokerage services, trading tools, magazine subscription, commentary newsletters, books, DVDs, etc. etc.). All comes in red ribbon package but with absolutely no guarantee or liability protection!

    One question that puzzled me for long time is why someone with presumably unique money-making skills (say a stock picker) would ever want to sell her/his service and live off commissions (or training class tuition) and not just utilize their skills and enjoy the presumed terrific returns?!?!

    Even more so, Larry Swedroe wrote fantastic books but he works for BAM who promotes DFA funds… Rick Ferri wrote excellent books but his company builds ETF based portfolios… Peter Lynch is a Fidelity person… Are they more trustworthy than KP magazine?!

    So whom shall one believe? Where can one get good advice?

    Here are my answers (and that’s what draws me to Jonathan’s (this) blog):
    1. Always educate yourself
    2. Research, read, and talk to many people
    3. If it’s too good to be true it probably is
    4. Never rush to make a decision
    5. Be careful with your money – S__t happens and you can’t avoid it
    6. Don’t expect the SEC, FINRA, SIPC, FDIC, or CFTC to save you from yourself (see rules 3 and 5 above)

    As I said Jonathan, a masterpiece!

  14. GroundPig says

    A portfolio of municipal bonds can yield around 5% tax free interest and free from AMT. They are also fairly liquid as well. After tax, a 8% yield can become 5%, and it also might put subject you to alternative minimum tax.

  15. Financial Independence says

    You have to understand that these magazines are either owned, or get their advertising revenue or both, from Wall Street investment firms. Their investment advice is filled with conflicts of interest.

    My problems with the magazines are threefold:
    1. The “investors” they profile are not representative of the general public. Usually they are high level corporate types with high incomes.

    2. Their covers almost invariably contain the word “Rich”. Pushing the idea that the only way you can become financially independent is by becoming rich. Take their advice and you will never be able to retire.

    3. They encourage a consumption lifestyle, which is not only destructive for the planet, it is also destructive to your finances. Forcing you to work longer than necessary to support your consumption lifestyle.

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