High Yields Without High Risk

I know my warnings about yield-chasing fall on deaf ears. That’s because most of the questions I field about the stocks in Utility Forecaster’s portfolios concern the high yielders—stocks that yield as much as 8.5%.

Don’t get me wrong, I obviously love high yielders too, but only if their payouts are supported by fundamentally strong businesses with solid balance sheets. These are the types of high yielders I recommend in our Growth and Income Portfolios.

Still, I won’t pretend that higher yields don’t come without higher risk. They do. It’s just a fact of life that most income investors would rather forget. Nevertheless, I believe the high yielders in our portfolios offer the right balance of risk and reward.

But if you’re a more conservative investor, there’s another way to approach income investing that yield chasers often overlook—one that, with a little patience, can actually give you high yields without high risk. And it happens to be central to the way I pick stocks for Utility Forecaster’s portfolios.

You see, as an income investor, I don’t just want a stock with an attractive yield … I want a stock with an attractive yield that’s growing its payout year after year after year. That’s how you end up with a stock that has a stealth yield of 34.3% (more on that below).

Dynastic Wealth

When you take these annual pay raises and reinvest them into more shares of stock, then that’s the path toward building truly enduring wealth.

And since Utility Forecaster specializes in companies that provide essential services—electric, water, gas and telecom—these are the types of stocks you can buy and hold forever because they’ll continually grow earnings and generate rising dividends.

So as you quietly collect your dividends from an investment strategy that you can set and forget, you could be on your way toward creating dynastic wealth, the kind of wealth that lasts for generations.

In the short term, yield chasers typically scoff at dividend growth. After all, why wait around for future income when you can have it all today?

But the reality is there are very few high yielders that offer truly sustainable dividends—I recommend these select few in Utility Forecaster’s portfolios. Most of the rest of the stocks in the high-yield space are one economic or sector downturn away from slashing their payouts and seeing their share prices plunge accordingly.

Listen, I know most of my subscribers are approaching retirement or are already decades into retirement. In fact, I regularly receive phone calls (and even handwritten letters) from folks well into their nineties.

When we chat about investing, occasionally I make the mistake of talking about “the long term.” These guys aren’t shy about reminding me that they may not have the luxury of a long-term investment horizon.

But everyone’s living longer these days. So it’s only prudent to complement those high yielders, with core holdings that are lower-risk, regulated utilities that have been growing their dividends every year—in some cases, for decades.

Unforgettable Yields

It’s incredible to behold what dividend growth does over time.

For instance, we originally added one of the utility giants to our Growth Portfolio at a price of just $13.79 per share (adjusted for subsequent stock splits).

After years of dividend growth, this company now pays out $3.02 in dividends per share annually, giving us a yield on cost of 21.9%. And more dividend growth is on the way—about 8% annually.

Later, we added a water utility to our Growth Portfolio for just $2.90 per share (split-adjusted).

After years of dividend growth, this company now pays out $0.7652 in dividends per share annually, giving us a yield on cost of 26.4%. And more dividend growth is on the way—about 7% annually.

Then, we added a pipeline company to our Income Portfolio for just $4.90 per share (split-adjusted).

After years of dividend growth, this company now pays out $1.68 in dividends per share annually, giving us a yield on cost of 34.3%. And, yes, more dividend growth is on the way—about 6% annually.

Now that’s what I call the magic and power of compounding! And those figures don’t even take into account the further yield-enhancing effect of reinvestment or the significant share-price appreciation you would have enjoyed along the way.

Admittedly, it can take decades, in some cases, to get those kinds of yields on cost. But let’s say, for instance, you bought our favorite mid-yielding pipeline stock in 2011 at the average price at which it traded that year. After just six years of owning this stock, you’d have a yield on cost of 7.8%, with (you guessed it!) more on the way.

Another midstream player that we added to the Growth Portfolio last fall when it had a yield of just 3.7% is on track to give us a yield on cost of 7.1% within two years.

This kind of quiet compounding is how you can turn conservative low or mid-yielders into high yielders. And these are the kinds of stocks that have given many of our subscribers stealth high yielders—and perhaps bragging rights they didn’t even know they had.