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.
|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,
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