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The dividend yield on the giant energy pipeline company Kinder Morgan (KMI) looked so juicy on Tuesday of this week. The combination of its high annual payout of $2.04 cents a share, and its closing share price of $15.72, pushed KMI’s indicated yield to an eye-popping 13%.
Then there’s the Alerian LMP ETF (AMLP), a diversified, benchmark ETF for the Master Limited Partnership industry. Over the past four quarters, it paid $1.18 in annual dividends, and it closed at $10.45 on Tuesday. That’s good for a yield of around 11.2%.
Then there’s Freeport McMoRan (FCX), the giant gold, copper and energy producer. With its annual dividend of 20 cents a share, and share price of $6.74, it was yielding a still-respectable 3%.
But in the blink of an eye, things changed. KMI slashed its dividend by 75%. FCX axed its payout entirely. And I seriously doubt AMLP will pay the kind of dividends it did in the last year over the next year or two.
That offers a simple lesson, but one I can’t repeat enough: You can’t just look at yield when you buy an investment. You have to figure out if that yield can last.
I actually liked and recommended MLPs for a couple of years when I had a more favorable view on the sector and the durability of those payouts. But I told my investors to cash in their chips some time ago in my Safe Money Report, with many having the opportunity to pocket double-digit gains, when conditions changed.
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| Dividend yields on some stocks can look enticing — but they must be sustainable as well. |
Now, I’m finding relatively safer yields (and the prospect for capital gains to boot) in other sectors. Consumer staples are at the top of my list, despite the difficult overall market. The Weiss Ratings are also a great tool to identify which companies have dividend durability, and one higher-yielding name they guided me to is delivering nice gains in the second half of 2015.
Here’s something else that’s very important to consider when you’re investing for income: You have to recognize whether the juicy yield you’re being offered will compensate you for the risk you’re taking on.
Just look at junk bonds. The SPDR Barclays High Yield Bond ETF (JNK) was yielding around 6% at the beginning of 2015. That looked attractive to some investors, considering 10-year Treasuries were only offering 2.2% at the time.
But I warned you to stay the heck away from junk bonds many times. Sure enough, rising credit woes and falling prices caused the JNK to tank — by so much, in fact, that it more than offset that juicy yield. Anyone who failed to heed my advice had generated an all-in loss of around 5.1% as of this week.
Bottom line: Yield is great. I’m sure you love getting paid while waiting for an investment to appreciate as much as I do. But if that yield won’t last, or if it’s not enough to offset your risk of capital losses, you have to take a pass. Instead, I recommend you stick with the kinds of names you’ll find in my Safe Money Report.
Until next time,
Mike Larson
P.S. Are you pondering what you should be doing now to preserve your wealth in a world gone mad?
A new report by Weiss Research Senior Analyst LARRY EDELSON has the answers you’re looking for.
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 26 comments }
In some respects the 2008 crisis “began” with the failure of the Bear Stearns Structured Credit funds. We now have Third Avenue Funds who “averted” failure of their credit fund by “distributing” units in a trust so they can liquidate in a more orderly fashion. History, if not repeating, then rhyming??
If high yield bonds are tanking why is nobody recommending Proshares Short High Yield SJB?
Some OPEC countries are already dipping into and selling part of their sovereign funds to offset expenses that are no longer fully covered by oil income. These sovereign funds are not trading stocks and bonds; they are unloading them for cash. As to myself, I do not see this as providing bargains to be had, but as additional excess of supply of stocks and bonds to go along with the excess supply of oil. And we all know how long the excess supply of oil has kept its price down.
Dipping is going to be heavy, many OPEC countries I have read need over one hundred to one hundred twenty dollars to fund the programs tied to oil production. In the forty dollar range they have a lot of shortfall. So do you cut production and hope the price rises to cover the cut or do you pump like mad to get whatever money you can? How much longer can you afford to rent oil tankers, at up to half a million a day, and when does the supply run out to store unsold oil?
While I’m sure your a great guy Mike, and I enjoy reading your thoughts and recommendations, you were recommending MLP’s just this summer back in June for the yield, how they had some insulation if the oil prices were to drop more due to the infrastructure aspect of the MLP’s and lower prices they had fallen too. Honesty is an important trait to me and I’m sure many of your readers. If people had followed that advice they would be down for a large loss, and here you are today touting how good you are at seeing these yields and prices fall further, amazing.
I did follow the advice and am now sitting on a loss. Easy for Mike to bounce with the waves
This is how Weiss works, on all their “services”. Had Larson’s Interest Rate recommendation service, on which he’s supposedly an expert. Virtually nothing but losers, huge drawdowns on options (which are almost always losing plays anyway, at least for those who buy them). And also the cross-promotion for other Weiss “experts”.
You asked your subscribers of Safe Money Report if “we are pondering how to protect our wealth” then we should read Larry Edelson’s report. We are paying you for that information not Larry. Stop pushing Larry’s high priced recommendations and do your own work and recommendations !!
HOW TRUE
I agree. Mike is one thing and Larry is quite another. The twain may or may not meet. They should each stick to their own things.
appears to me, bonds are the risky asset now.
an s&p fund like VOO yields about 2% and i can’t think of a safer place to be for the long haul.
‘Could be, $1000, but keep an eye on it. Hoodoo, VOOdoo, you know.
good one
VOO is the roman numerals for 500, as in the s&p 500. you’re getting the best 500 s&p stocks on the exchange. if one goes bad it falls off and the next best on takes its place, plus 500 top stocks is well diversified with a 2% dividend yield. why would i bother with bonds that have little yield and are getting risky?
The safest place to be is in cash. The volitily that is presently in the market is characteristic of topping action. I think we are seeing the final throws of a 7 year bull. There are huge divergences in the S&P compared to transportation, junk debt, Baltic Index. I suspect we will see one more rally as a gift from Santa ( at least I hope so)Next year will not be good for the weak of heart. It will become apparent that we have been experiencing a cyclical bull in a continuing secular bear which started in 2000.
Roman Numeral for 500 is “D “.
the letter “d” is already taken for a ticker, gaeton, so five zero zero has to be represented by voo, an easier way to remember the fund anyway.
The action of the stock market now reminds me of what Hannibal Lector said when he had the guy on a hand truck and was about to pitch him over the balcony………”Here we go…..!”
The same question is at hand though…..”…bowels in or bowels out??”
Well Tuesday should be interesting. Larry was wrong about his last BIG Date a month ago. We usually do have big swings on Fed day or thereabouts when traders wait with baited breath to see how she will tamper with the economy.
In November you suggested high dividend investments FGP, NTI, SXL, BEP, OKS, and TRH. In just about a month each and every one of these is down. Substantally! Should a person double down now?
Mike – You enjoy revisiting again and again (and again) past calls you’ve made that worked out. How about revisiting when you called the bottom for oil last March-April? You said you were one of the only ones to nail oil’s bottom, and offered a new newsletter. Why no updates on that past call of yours?
So, what are we to make of company announcements that the “dividend is safe”? What about the “experts” touting that the dividend can be paid out of long term contracts and is not dependent on commodity price? I could have bought a small house for what I lost in KMI in the last month. Seems to me that company’s representations were false.
I’ve followed the whole Weiss crew for year. I can remember when Weiss himself said he just put one million dollars of his own money into betting that the Dow would go below 7900 That was 2009.
Larry always brags to be the Gold expert when he said Gold was going to the moon past 2000..00
Everyone in this business is singing it. I think they all wake up in the morning to see what the other guy is saying. Fact is that we are all shel and the super computers are calling the shots.
Kinder announced that they wpuld continue the dividend until of course the people who are owed 41 billion dollars said, ” we don’t think so”
I thimk nobody knows what is going to happen
IT’S QUITE APPARENT THIS IS RELATED TO AN ARTICLE I WROTE WHEN I WAS 12 YRS OLD -AND WAS RIDING WITH MY MOTHER IN OUR “31 FORD MODEL A – WE GOT OUR GAS FOR 19.9 CENTS A GALLON :- WHICH INCLUDED THE TAX- 3…4 -5 CENTS A GALLON – MADE THE GAS ABOUT 15 CENTS A GALLON ; MAKING IT ABOUT $9-10 A BARREL UN-REFINED; Bernie sr