My wife and I bought a house in November, a big move for us from our small starting house to a bigger (and more expensive) house for our growing family. We were really lucky with our timing, finding the perfect home and a seller who needed sell quickly and accepted a much lower price than we expected. We were also lucky that the interest rates were incredibly low.
Together, we are in a fortunate position to have a mortgage payment that falls within our ability to pay, as well as being able to invest additional money every month in a “pay the mortgage” account. In short, with an interest rate of 3.75% on the mortgage, I expect that I will be able to offer a far better rate of return in the long run by investing that extra money in high yield dividend bonds than i would get pay off the mortgage. Go here for the longest version of that story.
Image source: Getty Images.
Let’s take a closer look at the top three high yield dividend stocks I have purchased, as they have done so far and my expectations for the future.
The strategy
My goal with this portfolio is not to provide higher returns than S&P 500; is to consistently and securely generate a rate of return better than the 3.75% interest rate I pay on my mortgage. This is a relatively low bar, but I also want to keep my risk of permanent losses low. This is why I am focusing on companies that should prove able to maintain their dividend and ideally increase it over time.
In order to reduce my chance of losses, I intend to invest every month in a high yield stock every month for the first year, and only then will I consider reinvesting in all the stocks I have already purchased. Furthermore, I am considering establishing some guidelines to prevent any stock from becoming too large a portion of this portfolio. This could include rebalancing my holdings if any share becomes a substantial part of this portfolio through high capital appreciation. This actually works counter to the way I generally invest, since I generally see selling stocks that have gone up as soon as because they rose as an error. But this is a unique portfolio designed with one specific goal: to exceed the 3.75% interest rate with minimal risk of permanent losses.
Let’s move on to the shares in which I invested.
The three high yield stocks I’ve purchased so far
I have invested around $ 250 each over the past three months. Here are the shares I have purchased so far:
| Action | Industry | Dividend Yield |
|---|---|---|
| Ford (NYSE: F) | automaker | 7.5% |
| NextEra Energy Partners (NYSE: NEP) | Yieldco | 3.3% |
| Tanger Factory Outlets (NYSE: SKT) | REIT retail property | 11.2% |
Dividend yield based on stock prices as of February 19, 2020 and most recent paid dividend.
As you can see, it is a relatively diverse group of companies, with no overlaps in their respective sectors. However, it is not a Perfect starting with full diversification. Let me explain.
Owning companies that do different things is not a complete diversification. Yes, these three companies do very different things: building cars, generating electricity and owning retail properties. However, when it comes to end market exposure and risks to your business, two of the three – Tanger and Ford – have a lot of overlap. This is because both generally need a healthy economy to stimulate demand for their businesses.
To put it another way, people are less likely to buy a new car or take a trip to the mall during a recession. Hence, although they do not compete for the same customers, Tanger and Ford should face similar implications for their commercial results during a weak economic period. But it’s not an exact correlation and Ford is an international company, while Tanger only operates in North America, so I’m not significantly concerned about the overlap in their risk profiles. But it is a good lesson in things to consider when building a really diversified portfolio.
How are you?
In short, so far it’s a bit of a mixed bag, and technically I had better put that money into the mortgage:
| Action | Month purchased | Total return (or loss) to date |
|---|---|---|
| Ford | February 2020 | (3.2%) |
| Tanger Factory Outlets | January 2020 | (19.9%) |
| NextEra Energy Partners | December 2019 | 15.3% |
The total return is the appreciation of the share price plus any dividends paid. Beginning February 20, 2020.
Two of my investments – Ford and Tanger – are losing money so far, with their combined losses exceeding the pleasant 15% gain that NextEra Energy Partners has made. So what happened?
For Ford, the company’s shares have continued to struggle since the company has achieved overwhelming profits, but I purchased my shares after the report was published and I had the expectation that his shares would probably get confused without generating significant gains. short term. But even in a bad year, Ford generated nearly $ 3 billion in adequate free cash flows.
For Tanger, his prospects have worsened since I bought it. The company announced in February – after I bought the shares – that 2020 would have been a little painful because it would have to lose some tenants. However, even with what is expected to be a difficult year, Tanger is expected to generate significant results, with a dividend coverage ratio of less than 75% at the bottom of the company’s leadership. It is very strong.
NextEra Energy Partners, on the other hand, is achieving solid results from its collection of wind, solar and natural gas resources, as well as a continuous race to the upside of the renewable energy performance certificates which has pushed its shares almost to the maximum historian.
Is it time to change strategy? Not so fast
A look at the results so far may make it seem like it’s time to change my approach. In reverse; I think it’s an excellent reminder that volatility is part of the “admission price” with equity investments, even with a lower risk strategy like this. More importantly, I actually didn’t lost nothing. I still own most of these three companies compared to when I purchased and my expectation is that, over time, the results that these companies will produce will cause stock prices to rise more often than those that go down.
Finally, the biggest key to this strategy is making money dividends, which will be paid quarterly from these three bonds. It will take longer for most of this strategy to also show up in the results. This means that I have to be willing to ride the short-term ups and downs of the market to profit from this strategy.