Why It's Okay to Reach for Yield

The scolds who forever preach that “reaching” for high-yielding investments is a one-way ticket to portfolio purgatory did not envision how markets would perform over the past year or, for that matter, the past decade. With inflation below 2% and long-term interest rates spinning their wheels, yield-centric investment strategies keep on paying handsomely. I don’t imagine that is about to change.

I have consistently urged readers to accumulate an array of securities, both stocks and debt, that pay at least 5% and to keep them through their occasional retreats. If you have done so, even a loss of 10% over the next year will not erase your long-term gains. Quick setbacks usually reverse themselves anyway. So please stifle any middle-of-the-night urge to leap from your mattress and trade your high-income holdings for Treasury bills and money market funds.

The winners. The rewards of yield-hunting have accrued not just to lucky guessers and market timers. Americans are blessed with a wide and diverse choice of liquid, income-oriented investments, and at any time, you can bet that one or more of these categories will be deep into the green. This year, it’s mortgage-owning real estate investment trusts, shares of high-payout wind- and solar-power producers, preferred stocks and high-yielding tax-free bonds. Last year, business development companies and emerging-markets bond funds starred.

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As for common stocks, except for energy producers and (this year) wireless-phone operators, investors are all-in on dividends. It is no accident that shares of 3M (symbol MMM, price $201, yield 2.3%), Boeing (BA, $242, 2.3%) and General Dynamics (GD, $196, 1.7%) are up from 60% to 80% since each started to raise dividends sharply in late 2013 and early 2014. (Prices are as of July 31.) By contrast, Procter & Gamble (PG, $91) slowed its dividend trajectory around the same time, and its stock has stagnated despite restructurings and management shake-ups. May I suggest that P&G instead try to mollify the market with cash?

The brightest lights this year in yieldland are funds and trusts that make a little leverage (that is, borrowed money) go a long way. Such closed-end funds as Avenue Income Credit Strategies (ACP, $15, 9.8%), Eagle Point Credit Co. (ECC, $21, 12.0%) and NexPoint Credit Strategies (NHF, $22, 11.0%) cover their distributions from current investment income and easily sustainable trading gains. Over the past year, these funds, which trade like stocks, returned anywhere from 16% to 40% (although, to be fair, some of those gains stemmed from the funds’ share prices climbing faster than the value of their underlying assets).

Okay, gang, what am I missing? Am I succumbing to irrational exuberance? Are my pet investments a step from disaster? Back in the 1990s and early 2000s, we had calamitous junk-bond defaults. The Dow Jones utility average dropped 50% from October 2000 to October 2002. Property-owning REITs lost more than 15% in 1990 and again in 1998. And all this stuff and more got crushed in 2008 (U.S. government bonds were about the only thing that worked during the financial crisis).

The quest for extra income isn’t a fad or the result of speculation by yield-starved investors. It even extends to higher-quality investments. For example, the 200 highest-yielding stocks in Standard & Poor’s 500-stock index have handily outgained the lowest-yielding 200 since the 1950s. In bonds, the standouts are triple-B-rated corporates, which normally sport coupons that pay about one percentage point more than double-A bonds of the same maturity. BBBs (that is buy, buy, buy) boast an annualized gain since 2007 of 6.7%, compared with 5.3% for single-As and 4.7% for double-As. There are parallels in municipals. I rest my case.