PortfolioMatters: Where's The Yield? (Guest Post)

By Charles Rotblut, CFA

Income-oriented investors have yet another reason to be upset with the bond markets. Junk bond yields fell to a record low a few days ago and are staying near those levels. As of the evening of Wednesday, May 18, the Barclays U.S. Corporate High Yield index yielded a mere 6.68%, which isn't much when you consider the risk of default.

These low yields are just one sign of the bond market's cheery mood. Corporations are finding plenty of buyers for their debt, and many offerings have been completed this week. Among the investment-grade companies selling bonds are Google (GOOG), Norfolk Southern (NSC) and Walt Disney (DIS). Included in this week's near-record level of junk bond offerings is beleaguered Chrysler, which is refinancing its loan package.

Taking advantage of the low interest rates is good for a company's bottom line, though it does raise bondholders' ire.

Eventually, these low interest rates will give way to higher ones. Even some members of the Federal Open Market Committee suggested that inflation risks may require monetary tightening sooner rather than later, according the Fed minutes released yesterday. Nevertheless, I continue to think that bonds do play a role in an individual investor's portfolio, particularly because they provide a return of capital, offer a regular stream of income and have historically been uncorrelated to stocks. (Low correlations provide diversification benefits.)

This does not change the simple fact that some of you still want more income out of your portfolios. So, I decided to take a look at stock yields to see what you could get. Specifically, I screened the S&P Composite 1500 and found more than 800 stocks that have paid a dividend for at least three years. The average yield of these stocks was 2.25%. (The S&P Composite 1500 is composed of the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600).

There are 50 members of the S&P Composite 1500 that currently yield 5% or more. Though the allure of higher income may sound nice, keep in mind that more than half of these companies are either REITs (18), electric utilities (9) or telecoms (7). In other words, the highest yielding companies are from a small group of industries. The higher income comes at the cost of diversification.

Then there is the issue of performance. The income generated by these 50 companies has not been large enough to offset the comparatively weak price performance. The average 52-week price gain for these stocks is 5.1%, whereas the iShares S&P 1500 Index Fund (ISI) has appreciated by 18.5%. Even once the dividends are factored in, the total return for the ETF is higher.

The concentration of industries and the lackluster price performance show that there is not a free lunch. Anything you do in terms of investing comes with a trade-off. When it comes to portfolio yield, you are currently faced with choosing between lower income, potentially falling prices for bonds or—in the case of higher-yielding stocks—a more concentrated portfolio. None of this is ideal.

Keep in mind that with taxes on dividends and long-term capital gains currently the same, you should be somewhat indifferent as to how you realize income from stocks. Withdrawing dividends or proceeds from the sale of shares both equate to money pulled from your portfolio. The only difference is transaction costs, which, with an online broker, can be very small.

Since I realize you would want to see the list, here are the 50 stocks that yield 5% or more.


Econmatters Note - Look for future guest posts from Charles and other authors as part of our new PortfolioMatters Series.

About The Author - Charles Rotblut, CFA is  the VP for American Association of Individual Investors & AAII Journal Editor.  Charles is also the author of Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio (W&A Publishing/Trader's Press). 

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

EconMatters, June 3, 2011 | Facebook Page | Twitter | Post Alert | Kindle