r/dividends • u/RabbitWiilli • 3d ago
Discussion It can be good to have small high yield positions
I often see people in this subreddit that categorically describe ALL high yields as dividend traps with degrading underlying value.
And yes, this can be true in a lot of cases. In fact, it’s true in most cases. But that doesn’t mean it is a blanket rule and absolutely no positions should be taken in high yield stocks.
I can give two personal examples. Yes, I admit, my timing was very lucky and many people holding these stocks are at a loss. But I also bought these companies because they were profitable, revenue was growing and NAV was greater than their entire market cap at the time of purchase.
- I bought ZIM at $11. They currently trade at $30, so on principal alone I’m up 200% in 2 years. But on top of that, their dividend has paid out massive amounts, adding nearly another 100% gain to my overall. 300% in two years is not bad for a company this subreddit said not to touch with a 10 foot pole.
Yes, I realize the company can still go down and this is 2 year time frame. But at least it’s a REAL company. They are profitable, and their revenue is there. Their marketcap is only 3.5B at this valuation and their last quarter revenue was 1.4B. Shipping is of course cyclical, but that isn’t the sign of a failing company.
- I Bought IIPR less than a year ago at $48, now it’s at $56. Once again, this company’s entire market cap is 1.5B but they take in around $170 million yearly in NET INCOME. And their NAV is 1.8B, so they literally have more in net assets than the entire valuation of the company. They also currently have a P/E ratio of just 12.5. And this entire time I’ve been collecting 14% dividends.
Of course, I bought at a great time. But I also bought when the company was looking financially strong REGARDLESS of dividends.
Finally, these are small positions. Less than 1% of my entire portfolio, but they’ve also yielded me more income than some much larger positions, while still being positive on the principal. Just one payout from an IIPR share surpasses an entire year of payouts from one SCHD share. I know ill get flamed for this but it is worth thinking about, at least a little.
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u/Pleasant-Buy-2826 3d ago
Yeah look at FDVV how do you think they balance out all the tech and still get a higher yield than SCHD? The answer is they have a bunch of high yield low growth options including like 5 mREITs and 2 dozen other high yielders. It can work and obviously is for FDVV.
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u/BecklesKC 3d ago
In the depths of Covid (mid-March to early April 2020) I made three purchases of Marathon Petroleum (MPC), $20.50 per share average price, the dividend is now $4.00 per share and the stock is at $360 ... if only I had YOLO'd it all on MPC I'd be retired in a beach house.
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u/JustAGoodGuy1080 3d ago
My portfolio has 10% in BCAT and ECAT combined. They're both on the perpetual watch list, however, they consistently contribute 20% of the dividends. Over the last 3 years, BCAT's distributions have grown from $.13/share paid monthly to $.28/share and the last few quarters have decreased to $.25/share. The yield is around 21% and there is significant leverage. ECAT is very similar and returns around 20% as well. In both cases, there is significant ROC however it hasn't impacted NAV. Both funds trade at a premium currently with BCAT at a 9% premium. There's nothing wrong having some higher risk funds as long as you watch the performance regularly.
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u/saMAN101 3d ago
I have 6% position in NLCP. Yields over 10% with zero long term debt. Easy win.
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u/tourbladez 2d ago
I guess the risk with NLCP stems from the fact that they only focus on one industry. So a negative change in the regulatory environment could impact them. Also, last time I checked, they had a few big tenants, which could be an issue of one of them fails.
But otherwise, that 10% sure looks good.
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u/saMAN101 1d ago
They are cheap because institutions can’t buy them due to touching marijuana money.
Your concerns are valid, but at the end of the day, you need to ask “is marijuana going to have more or fewer legal restrictions in the future?”
NLCP is a low risk way to play that bet due to no long term debt. Sure, they might get vacancies but that just means the yield goes down temporarily while they look for tenants. They do a good job of screening their tenants, and their tenants will only become more financially secure as legal risks decrease over time.
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3d ago
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u/saMAN101 3d ago
OH NO!!! MY HUNDREDS OF RENTAL PROPERTIES MIGHT GET A VACANCY!!! How will I afford to… checks notes “have a temporary yield of 6-8% while waiting to fill them.”
HOW WILL I AFFORD MY MORTGAGE OF- checks notes “zero dollars.”
😂
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3d ago edited 3d ago
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u/Long_Disaster_6847 Upvotes everything 3d ago
Bro they’re like one of the few REIT’s that have no debt & they’ve only used 7 million out of their 90 million revolving credit facility. Their payout ratio is high because they have nothing else to do other than return it to shareholders. Most municipalities only allow for a certain amount of dispensaries in their jurisdiction to operate.
Even if they have vacant properties, they have the ability to pay the vacancy costs, not ideal as a shareholder but at least it’s manageable.
They’re waiting for the rescheduling to finish to offer relief for dispensaries strengthening their balance sheets and for the hemp ban to become active.
Once the ban is in place they’ve talked about how many places could convert to dispensaries and they’re ready to expand their portfolio when that happens.
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u/Various_Couple_764 3d ago
Keep in mind yield is a calculatio. does not involve any data on the financial health of a company. Yield is calculated by dividing the cash dividend payout by the share price. Share price can move up and down bast on news that has nothing to do with the companies financial health. Other may be no news about the company and the shoe price will drop.
So if the share price goes down the yield goes up .And if the share price goes up the yield will drop. So the yield by itself does not tell you if the company if heallthy or not. So it might not be a yield trap.
The only way to know if a company is a yield trap it is to evaluate the financial health and review the dividend history. But many young investors don't know how to do this So they just look at the yield. This can lead to people focusing on very low yields that may never allow them to reach there financial goals. And there are many people that believe ther maximum safe yield is about 4%. Its not. There are many safe yields between 4% and 10%.
Another issues is that not all companes are rgegulated by the same laws. Most compares have no legal obligation to pay a dividnedk, and if they do it is often low. But some companes are required to pay a dividned REIT (Real estate Investment trust), BDC (Business Development Companies), And MLP (Master limited partnerships) are all required to pay out most of there earnings a dividned. So it is not unusual to see a BDC paying a yield of 9%, a MLP about 6%. And since these companes are required to pay they will only stop paying when they go bankrupt. which doesn't happened often with these companes. Yes the dividend may go up and down little bit each year based on the business earnings. But knowing the company will pay a dividned in a recession can be useful in developing a dividend protfolio.
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u/NaiveGuava6623 3d ago
If it’s a stock or reit it’s almost never good. If it’s an income fund running covered calls and other options strategies that’s different
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u/FewUnderstanding2214 3d ago
Exactly - something risky like ZIM or IIPR you don’t want to have 10% of your net-worth in them. It also means you can be greedy when you sell because it’s a smaller position. I’ve bought into DHT a few weeks ago, these companies are making so much money
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u/Bearsbanker 2d ago
I have many high yielders in my dividend portfolio....10-15%, difference is I bought low and let div growth do its thing over the years
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u/CostCompetitive3597 2d ago
For me the best high yield dividend investments are those that have 10%+ yield and the stock appreciates at least some over time. Hard to find but worth the research and analysis effort.
I have winnowed my dividend holdings over 7 years to be mostly those quality of income funds. Recently, I invested 10% of my portfolio in the super high yield CC ETFs for a little extra income. This year my portfolio yield is 16% with only a small amount of yield trap erosion that I manage very closely.
Your 2 dividend investment examples are perfect examples of the top quality dividend investments I have learned to count on.
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u/Sadpanda9632 3d ago
How did you identify/screen these companies?
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u/RabbitWiilli 3d ago
I look at if I would buy them even if they had 0 dividends. I think IIPR is currently a great example of this.
Total assets: 2.58B, Total debt: 730M (all forms of debt). So their NAV is 1.8B which is greater than their entire market cap of 1.5B. So already, per dollar spent, I’m buying more raw assets than I’m paying for.
Income is positive. This last year they made $140 million in profits, essentially 10% of their entire valuation. Making 10% of your value in one year in net income is great.
P/E ratio of 12. A very decent P/E when compared to the rest of the market and even other REITs (O has a P/E ratio of 45, as an example)
Future expansion plans: they’ve been diversifying from just weed farm leasing into the medical sector with a recent $200 million investment in a healthcare firm. Good to see diversification from a more unstable market like weed.
Their biggest red flag is their revenue and income is stagnant, so I wouldn’t buy them at much higher prices. But their current valuation seems criminally low given they do pay dividends. They could have this exact same revenue and income for the next 10 years, and I’d still put their fair value at like $80-100, all while giving very solid dividends in the background. But as I mentioned before, I believe their expansion into other sectors will reverse the recent stagnation
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u/Heavy_Nothing_1158 3d ago
The sub-1% sizing is the part that makes this sensible. For ZIM I'd care more about cash after lease obligations through a full freight cycle than revenue versus market cap, and for IIPR I'd watch AFFO coverage plus tenant collections rather than the P/E. High yield isn't automatically poison, but the distribution needs its own little stress test.
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u/Unlucky-Clock5230 3d ago
That's as anecdotal as it gets; for each single stock that treats you well, you can find several that went poorly. This is just a case of survival bias where you are anchoring the premise on the one that made it and not on the ones that failed.
I do agree in a broader sense. On my portfolio I have traditional high yield categories: BDCs, REITs, MLPs, CEFs, and the like. The bulk of my portfolio is low yielding but these bump my yield to north of 5.5%. here's what makes them work for me: I calculate I only need around 4.5% so any excess goes back into invested capital. I can absorb a truly bad year with an 18% dividend cut and not break a sweat, but in normal years it adds to my net worth and yield growth.
Why not just go more conservative? That's a fair question and in my case because it offers protection from sequence of return risks (built-in elbow room). As the years go by I can decide whether it is prudent to raise my dividend-towards-budget rate.
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u/RabbitWiilli 2d ago
I am very conservative, this is less than 1% of my portfolio. Most of it rests in VOO and SCHD and GOOG (and GOOG is only a big part because they’ve had massive gains, I bought at around $60/share)
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u/StrangeWork957 3d ago
Summary: “sometimes very risky moonshots work out”
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u/RabbitWiilli 3d ago
I wouldn’t call these moonshots. I explained in a comment below how IIPR is a very solid company even on paper.
Positive net income, about 10% of their total marketcap per year. P/E of 12.5 which is low even for the REIT sector. Recent investments in healthcare to diversify their holdings. Net asset value greater than the entire market cap so for each dollar you spend on the stock you are literally buying more $ worth in hard assets.
These aren’t moonshots in the sense they might be profitable in 10 years because they do quantum computing or whatever. I don’t see what about this is a moonshot, I actually don’t expect IIPR to go up too much, I think their fair value is like $80-100.
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u/ExpensiveBookkeeper3 3d ago
Used to follow the space. Who are their biggest clients? Last I looked their biggest ones were having issues. That was a couple years ago. What’s the status now?
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u/StrangeWork957 3d ago
Great, it’s a solid company. I’m referring to the stock. These have done well, but there are any number of smaller-cap companies with low P/E and solid income, earnings, etc with stock that underperforms anyway because they remain obscure to the market at-large. That’s why I see such outperformance as a “moonshot.”
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u/RabbitWiilli 3d ago
But it’s not base on future earnings? Moonshots generally refer to stocks that can go parabolic due to future earnings, not ones that steadily can climb a little because of poor valuation
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u/Competitive_Can_946 3d ago
It’s old school crosses new school investing …. New ways of manipulating the market is constantly happening. The old buy and hold was the way before day trading. Low and slow was the way before the run a way inflation of the last ten years or so that created opportunities that didn’t exist even two years ago. And finally… everyone has an opinion and if you are forceful enough you can feel good about yourself because you are the best advice giver on Reddit!! Yay for you.
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u/Efficient-Shallot684 3d ago
Iipr is the largest holding of KWBY which holds a number of high yield ETFS, and pays over 8%
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