How to invest in sustaining HY dividend stocks?

Dividend stocks are prime earners of investors’ profiles. These are mostly dismissed as monotonous but are highly valuable, primarily if invested for long. The research on such stocks finds, between 1960 to 2017, reinvested dividends delivered over 82 per cent of the total of the S&P 500 index (as per The Hartford Funds).

The earnings remain unchanged for a year; moreover, some companies increase the rate, while some may keep the rate the same for years. The calculation of rate shows the higher the stock value, the lower the rate, where the HY stocks may have a fall in the price, symbolizing bargain price. 

The greater payout is undeviatingly related to the jump in interest rates. If the rate increases, the cost to run the company increase and lower earnings can lower the stock price. 

A study by Global X Funds found the best stocks thriving during the rising rate phase were the HY (in years from 1960 to 2017). But it is necessary to be careful while selecting such stocks, where some struggling firms pay hefty payouts to tempt investors. 

To spend on safe stocks, check the payout ratio, that is, the rate of net income the company pays to shareholders. Lower the rate reliable is the stock. 

How do you identify risky stocks?

The debt to equity ratio should be low, and free cash leftover with the company – which the company pays as an expense, should be positive. However, a super HY can symbolize the company is propelling the stock price down to boost yield.  

Such a trend indicates problems, which can be provisional or a crisis, faced by the firm, depending on several factors. Some temporary factors can be - delays in production, labour strike, or inadequate labour, or it can happen due to accounting scandals or high cash burns. 

Some firms' REITs deliver generous yields due to favourable tax treatment, where they have to put out 90 per cent of the income as payouts. 

MLPs and preferred can give such payouts as per legal obligations.  Investors should try to gain information about the legalities involved before buying such stocks.

Since the financial crisis in 2008, JP Morgan Chase and Berkshire Hathaway grew 141% and 113%. JPMorgan is considered better as it frequently gives such payouts, and the average yield of the company was 2.8 per cent - which is approximately the rate of the average dividend yield of the S&P 500. In 2008, in January, JPMorgan Chase stock paid up to $16.46, and the stock price was $42.17. 

The total return from the share (which includes the dividend) is 180 per cent, and Berkshire Hathaway delivered 113 per cent overall, as it does not pay any dividend. The analysis finds the JPMorgan Case stock delivered over 85 per cent from the payouts itself. Similarly, IBM, International Paper Co., ONEOK and Schlumberger are some US-based HY dividend stocks. 

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