Written by: Wealth Effect Blogger
Waiting outside the football stadium after every home University of Southern California football game, is a row of street vendors eager to sell their bacon wrapped hotdogs they are grilling along with onions and peppers right in front of you.
The smell of all that bacon cooking is simply intoxicating.
Then they start calling out to you “Hotdogs! Get your bacon wrapped hotdogs! Hotdogs! Get your bacon wrapped hotdogs!” and it makes you want it even more, even if you’re not hungry. (For those of you who are not fans of hot dogs or bacon simply imagine the smell of freshly baked cookies that makes you want to eat one even if you are not hungry.)
So far I have been able to resist the calling of these deliciously smelling treats but I know one day when I am faced with a combination of hunger and the sight of a perfectly cooked dog I’m afraid I just might crack and purchase one.
Wall Street firms are also trying to sell products to a population hungry for income and they also have a catchy chant “Yields! Get your juicy yields here. Yields! Who doesn’t want higher yield today?”
I don’t believe that all products (stocks, bonds, or funds) that have enticing yields are bad I just think some products have been handled, prepared and packaged safer than others.
Here are issues to consider when looking at enticing yields:
- Is the yield high because the price of the bond or stock has fallen dramatically? These are the most worrisome to me as falling prices tend to reflect falling sales and profits which tend to lead to the cutting or eliminating of dividends or interest payments.
- Is the yield high because there was a special dividend that may or may not happen again?
- Is the company paying out too much of their profits as dividends so there is nothing left to reinvest in the company to keep it competitive? If the company doesn’t stay competitive, eventually sales and profits will fall which tends to impact their ability to pay dividends and or interest payments.
- Is the yield high because the company or fund is using borrowed money to leverage it up? Leverage tends to work very well for investor’s in good times but tends to be very bad for investors in bad times.
- Is the yield high because it is really just a return of your principal instead of just profits and/or income the fund has generated? This point really just applies to funds rather than individual stocks or bonds. If you notice your principal shrinking steadily every month you may want to ask out the company or fund is paying for the dividends they are sending you.
- How high is the yield of the stock/bond or fund relative to its peers? If the yield is much higher than you need to find out what the company is doing differently to come up with a higher yield.
- When was the last time the dividend was raised and/or lowered? I would rather own something that pays a steady dividend than one that is raising and lowering dividends all the time.
I am a small business owner who believes most Wall Street produced financial writings belong into one of two buckets: propaganda or painfully dull. I am attempting to offer an alternative by writing articles people can relate to and to give them a better understanding of finance.
To learn more, visit my blog at www.yourwealtheffect.com
7 thoughts on “Bacon Wrapped Hotdogs and Enticing Yields”
Bacon wrapped hotdogs!?!? The person who concocted this is a genius!!! =) Great post and great points. My parents have gone “yield hunting” lately and I believe it will turn out very poorly for them, especially with the potential for a financial cliff around the corner. I also agree that the majority of wall street and financial advisors push blanket propaganda or make investing PAINFULLY dull. I look forward to following you. Keep up the great work!
Marvin, 100% agreed. 🙂
For American investors (for Canadians it’s a bit more complicated) it is much simpler, you need only two rules. Do I recognize the company (i.e. a blue chip stock), And do they have a history of raising their dividends. I mean as long as your not over weight in any one stock or don’t panic if the price drops you can’t really go wrong. It’s not anymore complicated than that.
Mentioned this elsewhere but I’m considering putting a shit load of money into PGF (Penngrowth Energy) as it’s on sale. The dividend got cut a while back so not worried about that. Also it’s at it’s 52 week low and yields over 8% For Canadians that’s like getting 12% after taxes!!!!!
For me price and yield are right, prepared to hold it long term, even if the dividend never gets increased I’m happy.
Hi Rob, be careful and do not fall into the high yield trap. 😉
PGF is in trouble. A good company never pays a high dividend, especially in the 8%+ range. PGF borrowed over 385 million on Oct. 18th at over 13% market cap. Why? PGF is also likely using a very high amount of its cash-flow to pay the dividend, and likely diluting it’s shares as well. That means its just issuing more shares to cover the dividend, instead of paying dividends out of cash. This can also result in a price decrease over time as well since the number of shares increases.
The recent dividend cut was a good thing for this company, but they will likely have to cut the dividend again. I sold at 6 dollars, and I am glad I’m out (blog post coming). Dangerous waters ahead – depends on your risk tolerance and stomach to take further losses. Is it cheap or on sale? No – the market has assessed this stock correctly IMO.
Like I mentioned before thanks for emailing me, I should have known better but I think I got seduced by the high yield and the previous dividend cut, so your email brought me back to earth.The reason why I was going to put so much in was I got priced out of couple of stocks I wanted and had some extra money. (Not that I have extra money very often:) )
Funny thing is I emailed a friend something similar when he was going to do the same thing, guess human nature never changes
Avrom got your email THANKS!!!!
Wealth Effect Blogger – excellent post, and thank you! 🙂
Comments are closed.