Do you like dividends? I do. And I thought it would be instructive to see which are the three top-yielding stocks in my portfolio. It was quite a surprise.
First off, all three are currently yielding over 6.5%. Thats a remarkable rate of return that thrashes any kind of interest you can earn on cash. If those companies just maintain their payouts dividend per share at the current level, and their share prices dont move, then Ill double my money in 10years just by re-investing dividends. Its no wonder Albert Einstein called compound interest which is what makes dividend re-investment so rewarding the eighth wonder of the world.
Secondly, two of the three companies happen to be the two biggest companies on the London stock exchange: HSBC (LSE: HSBA) (NYSE: HSBC.US) and Shell (LSE: RDSB) (NYSE: RDS-B.US). Many sophisticated investors eschew large caps. Renowned investment guru Jim Slater summed it up: Elephants dont gallop. Well, its true that large companies cant grow as fast as small caps might, but with dividend re-investment, the size of your own holding can. So Im not size-ist, but rather see market capitalisation as one way of diversifying my portfolio. The third company of the trio, property company NewRiver Retail (LSE: NRR), has a market cap of just 372m: one three hundredth of HSBCs.
If youre investing for dividends you want to know that the payout is safe and sustainable, and also that the share price will progress. Theres no point losing in capital what you earn in dividends. This is where stock-picking comes in.
Shell is the crme-de-la-crme of reliable dividend payers: it hasnt cut the payout since the Second World War. The fall in oil prices has taken its toll on Shells stock, which is down about 12% since last July. Ive seen this as a buying opportunity.
Shell is certainly capable of surviving a low oil-price environment. Apart from cutting operating costs and capital expenditure its selling non-core assets, whilst its low net gearing just 14% gives it fall-back capacity to borrow to supplement its prodigious cash flow. Sure, oil could fall further, but its more likely than not that prices will rise again in the long term.
HSBCs shares are back where they were three years ago, and down 25% from their highs in 2013. Investors are right to be wary of banks. Bankers remain Public Enemy Number 1, and the scandal over HSBCs Swiss banking operations have tarnished its image. HSBC has reduced its long-term financial targets, citing the huge cost of regulatory compliance and capital requirements.
That may curtail dividend growth somewhat, but a near 7% yield isnt a bad starting point! The bank came through the last financial crisis relatively unscathed, and its scale and geographic spread add to its security.
Value, not glamour
NewRiver Retail is a niche REIT that specialises in refurbishing down-and-out shopping centres in second-tier towns. You wont find any prestige developments in its portfolio; what you will find are shopping centres in places like Grimsby and Romford, filled by tenants such as Poundland, Primark and Superdrug. Glamorous it isnt, but those retail names demonstrate how you can make money at the value end of the market.
Property companies thrive by being clever. NewRiver started buying in 2009 when confidence and prices were rock-bottom. It refurbishes and restructures leases to bring in anchor tenants like supermarkets to increase footfall, and it leverages institutional capital through joint-ventures. In 2013 it bought 200 pubs from Marstons, which it is converting into convenience stores.
Buying shares in companies like Shell and HSBC is a no-brainer compared to a stock like NewRiver, where you need to do a lot of research to satisfy yourself that it’s a good investment.
But whatever your approach, buying the right high-yield shares is a great way of getting rich in the slowly-but-surely style that beats get-rich-quick stock market tips. I recommend you take a look at this exclusive report from the Motley Fool, which is packed full of advice on how to build a dividend portfolio. Just click here to download it— free and without obligation.
Do NOT buy these 3 stocks
Theres lots of opportunity out there in todays market but theres also PLENTY of danger.
In anticipation of Champion Shares PROs brief opening to new members next week, the analyst team behind the Motley Fools most exclusive service has agreed to share 3 stocks they believe YOU would do best to avoid.
PRO research is rarely made available to the general public. To find out the names of these “don’t buy” companies — and to claim your 100% FREE copy of Steer Clear Stocks right away — simply click here.