Bookmark and Share

Reader Question: Why Do My High-Yield Stocks Produce Losses And How To Turn Them Into Capital Gains?

I’ve received an e-mail from one of my readers. Here is his mail:

“Dear Tom,

Want to let you know that I thoroughly enjoy and appreciate your dividend newsletter for starters I wish to apologize on behalf of correspondents who are blatantly rude and disrespectful to you. If I have a disagreement or question for you I certainly would be polite....common sense.

I am retired and have money to invest and am concentrating on high dividend paying stocks.  But so far I am making good money on dividends but am currently getting more capital losses than capital gains.  I have made costly mistakes but am benefitting from them.

If you could suggest any strategies plus make suggestions I am ready, willing and able to digest same.
Very Respectfully”

Well, a one way strategy to make money without any losses does not exist. I personally made losses but they were not significant in relation to my current unrealized and realized capital gains.

The first question is in my view how much risk can you shoulder to get a higher return. I believe that investing should improve your live quality and should not end in hard work. Stocks and everything surround should bring you fun and cause in a better life. If you are retired, you have not as much time to wait for returns as a younger investor.

If you say that you make losses, I would be curious to know what kind of stocks do you own and how long do you have them? This is a fact that I hear from several investors. They receive high dividends but make losses on their assets. I discovered that it has reasons when companies are low valuated and high yielding. The truth is that all others know the problems of the company and core investors sell their stocks before everything is public.

I don’t like higher yielding stocks like PBI despite the fact that they have realized a great return since the beginning of this year. The market knows everything, much more as we all because he is an expression of all contributors and stakeholders of the company.

My strategy is to buy stocks and hold them, receiving the dividend and see how my yield on cost rises in average, year over year. I don’t follow the company’s happenings in detail. It’s a passive income with passive work but highly scalable.

Back to your problem. I prefer lower yielding stocks with a higher and more consistent growth. It’s even better if the company has low debt as well as a good management team.

As of now, there are still opportunities with a 3%+ yield of which you can expect that the income will grow with a rate of 5-7% per year.

When I buy stocks I always look at the long-term history of a stock. If they doubled sales every 10 years and they have revenues over $10 billion, I am interested to discover more of the stock if earnings grew faster than sales. Also important for me is the stability and volatility of the growth. A highly cyclic company is not the right stock for me. Finally debt and cash flows matter. The company must create strong cash and should be able to give shareholder value back in some way.

If you start buying stocks and you plan to hold them over a decade or more, your first years will be the hardest if you are in an overvalued stock market. I have no idea if the market today is overvalued. It’s primarily a question of the future growth perspectives from the companies. If a recession comes, a blast of the Chinese housing bubble or even a break-down of the Euro, the market is definitely overvalued.

My approach is that the economy will recover and improve over a long period. It’s like an economic balance. The only question is “how long does it take” to get balanced. Since 2008, the market needed five years to get back to the historic levels. It could also possible that you see decades of slow growth or no growth – Look at Japan. If you are at the age of 65 or older you must consider this for your asset allocation.

The best category to place money is in my view dividend growth from companies with international sales and future growth potential. Companies like Nestlé, Procter & Gamble or Nike have a big brand portfolio which produces strong cash flows and their client basis is still rising. Coca-Cola is the dominating player in the soft-drink business but they deliver only 1% of the daily beverage consumption of a person.

A past performance does not mean that the business model works for the future but in my view, companies like Coca Cola or McDonalds have a big cash flow and the best human skills do develop markets better than their smaller rivals. They handle recessions more effective and gain market share in every depression.

I reduce the residual risk by putting not more money into a single stock of more than 1% for a non-core holding. If I am wrong with my company, I could only lose 0.5% over years if the stock is down 50%. That’s not much when I receive yearly 3% in dividends from my portfolio holdings.