When I recently interviewed StreetAuthority Stock Market Strategist Elliott Gue in a conference call about some of his favorite income stocks and investing strategies, it was the audience's response to one particular question that surprised me most.
Allow me to explain...
The technology we used on the telephone conference allowed me to survey listeners during the call itself and receive instant results. (I'm sure many of you have participated in a similar exercise: 'On your dial pad, press 'one' for 'yes' or 'two' for 'no.'')
At one point, I asked: 'Have you ever bought a high-yielder you lived to regret? Press 'one' for yes...'
The virtual switchboard lit up even before I could get to, 'Press 'two' for 'no.'' Within seconds, I could see on the computer screen that more than 60% of my listeners had, in fact, been burned by a stock that they purchased primarily on the promise of the big yield it offered.
I'll admit to having been a little surprised -- not to mention unsettled -- by the 60% number. Elliott, on the other hand, has seen it all before.
'One of the biggest mistakes that I see a lot of investors make is that they focus solely on the highest-yielding equities in the U.S. market,' Elliott said on the call. 'They simply run their finger down the page of The Wall Street Journal looking for stocks yielding 10% or more. The problem is that the highest, most tempting yields are often the riskiest.'
The antidote?
'Look for firms with a solid yield AND a history of boosting their payouts over time,' said Elliott.
On the conference call, Elliott cited details of a stock screen in which he isolated a group of companies that demonstrated a three-year dividend growth rate, along with prospects for more of the same over the next few years. This basket of stocks returned 619% over the prior decade, trouncing the S&P 500 by a more than 5-to-1 margin.
Elliott's research confirmed that many of the most promising dividend-growers have yields of 5% to 7% rather than 10% or more. Moreover, Elliott found, many of the biggest winners are those stocks that are growing their payouts at a 10%-plus annualized pace.
Another factor Elliott said he watches closely when it comes to selecting a 'safe' dividend payer is the payout ratio -- the percentage of profits a company pays out in dividends. When a company needs more than 80% of its profits to pay its dividends, 'investors should tread carefully,' Elliott said, adding that payouts of more than 100% are unsustainable.
(Don't be fooled again. Click here to learn how you can obtain a copy of Elliott's special report, 'Is Your Dividend Safe?' -- four simple rules to help you spot vulnerable dividends. It's part of a subscription package that includes six other bonus reports.)
Elliott also looks at a company's debt levels when assessing dividend safety. 'Companies with high debt may have to cut their dividends to pay interest on their loans,' Elliott said, while 'failure to make debt payments would probably result in default and serious consequences.'
But the best tool of all for investors in search of safe, high yields might very well be Elliott's rebranded advisory, High-Yield PRO.
If you haven't heard, Elliott is adding a number of valuable features to the newsletter formerly known as High-Yield International.
For one thing, Elliott will for the first time in this advisory make specific recommendations on U.S. income stocks. These picks will be bought and sold in a portfolio separate from his tried and true international recommendations. All of Elliott's trades going forward will be funded with $200,000 in seed money from StreetAuthority.
Each issue of High-Yield PRO will also include a basic options trade designed to generate even more income. And you won't want to miss Elliott's monthly 'Dividend Blacklist' -- a list of companies whose payouts Elliott thinks could be vulnerable to a dividend cut over the next six to 12 months.
For more information on High-Yield PRO, click here.
