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Investing for High Yield

Updated on August 14, 2014

Investing for High Yield: e.g. Retirement Income

Throughout a working career people generally invest for growth: accumulate as much money as possible to be able to afford to retire, but at some point the investment portfolio must be shifted into something that will pay a high income: typically an annuity, corporate or government bonds, but high yield stocks and shares can also provide income, and can also be used during the accumulation stage (although the dividends may not be treated as favourably by the tax-man)


Here I shall look at how to invest in high yield shares, both for safe reliable growth and for a steady income.

Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.

High Yield Shares

Bargain Value Stocks

During the recent world-wide stock-market rallies (March to November 2009) the shares in good reliable safe large companies got left behind. Much of the initial growth in the markets was a "Dash for Trash": people bought stocks that had been hit hard by the Credit Crunch and made huge returns as the prices recovered, despite many of these companies cutting their dividends completely and in some case being barely solvent. The big safe blue-chip companies however paid out good safe dividends, but grew at a far more pedestrian rate. This left many apparent bargains: UK companies such as Vodaphone (VOD), Unilever (UNLVR), Sainsbury (SBRY) and Glaxo all paid dividends far in excess of the bank base rate.

It is important to check the safety of a dividend before investing, by checking the dividend cover, dividend yield and PE ratio. To see how to assess the value of a company and the safety of it's dividend: See this article...

While these shares cannot be immune to any future downturn they are less likely to fall back as far and probably will keep paying out the big dividends.

Investing in Funds

Investing in Managed Funds

Mutual Funds, Unit Trusts, Investment Trusts or OEICs

If you don't have the time or confidence to pick individual stocks or want to just spread a small amount of money across the market then managed funds are the answer and there are many that specialise in Value or Income investing. Warren Buffett is perhaps the most famous Value investor in the world, but in the UK the most famous for Income investing is Neil Woodford who manages high income equity funds for Invesco Perpetual and the Edinburgh Investment Trust. His performance over the recent rally may have seemed poor, but that is because he invested in safe companies that may have been left behind, but still represent great value. Putting your money into a managed fund reduces the risk compared to individual shares and avoids the broker commission, but the initial and annual management charges soon add up if you are investing a larger sum.

Follow the Masters

Follow the Masters

Fundamental analysis is the favoured tool for Value and Income investment, but analysing hundreds of shares to find out which is the best value is very time-consuming. There are screening tools available from various web-sites (e.g. the Financial Times or Investors Chronicle) that allow you to list all shares that meet various criteria such as PE, yield and dividend cover, but for a quick overview of the top-ten favourites have a look at the top-fundmangers, such as Neil Woodford (e.g. have look at the Edinburgh Investment Trust annual report for the top ten equities to see what he favours) and compare with other similar funds. Neil Woodford actually prefers Pharmaceutical shares (e.g. Glaxo and Astra) to oil giants (BP and Shell which also pay large dividends, but he believes may cut dividends in 2010) other fund managers disagree. This is however just a starting point and only represents a snapshot of part of the portfolio (the managers may have more complex trading and hedging reasons for owning some of the components of the portfolio)

The Top Ten Holdings of Edinburgh Investment Trust (at time of writing: 28 November 2009)

BP 8.50%

Royal Dutch Shell 7.90%

HSBC Holdings 6.00%

Vodafone Group 5.80%

AstraZeneca 3.70%

Imperial Tobacco Group 3.50%

National Grid 3.40%

British American Tobacco 3.30%

Anglo American 3.00%

BG Group 2.80%

Balancing Your Portfolio

Investing In Gold: No Income, just Growth (and Insurance)

Investing in gold will not pay you a dividend, but it will provide some insurance against inflation and financial instability and hopefully some growth too. It is often recommended to have 5% to 10% of a portfolio just in case.

Money!

Money!
Money!

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    • jackieb99 profile image

      jackieb99 6 years ago

      Thanks for all the good info. I'm looking to retire early so found is very helpful

    • MargoPArrowsmith profile image

      MargoPArrowsmith 6 years ago

      Yup, growth and income are the challenge, now a days retirees need both

    • onlyoneadam profile image

      onlyoneadam 6 years ago

      Hi Andy, really useful info; I work in utilities, on occasion with a company that occasionally offers out free share options; not taken a look at telecomplus/utility warehouse values lately but seems to be a solid performer?

      I work with commercial energy mainly, which seems to be an ever increasing cost market, so BP of course would make sense

    • RuthCoffee profile image

      RuthCoffee 6 years ago

      Oh dear, I need to come back and read through this again. This is exactly what I'm hunting for right now. I've sold out of one of my high yield funds recently and want to find another.

    • profile image

      anonymous 6 years ago

      Probably some great information here, although I tend to be one of those very, very safe investors, keeping our retirement funds in regular RRSP / GIC's through the bank. The high interest rates are not there, but I don't worry about it. My bank manager used to always try to get me to expand our portfolio, but that just is not gonna happen. I'm such a chicken LOL - Kathy

    • Andy-Po profile image
      Author

      Andy 7 years ago from London, England

      BP is no longer paying dividends after the oil spill disaster in the Gulf of Mexico, which impacts a lot of UK (and US) income investors, because BP makes up such a huge percentage of the dividend income from FTSE 100 shares, but all is not lost: Glaxo Smith Kline (GSK) another one of the big UK dividend payers, today announced their Q2 results and a 7% increase in the Q2 dividend: 15p. The Glaxo Q2 ex-dividend date is 28 July, Record date 30th July and payment date 7th July

    • profile image

      anonymous 7 years ago

      Certainly some high yields with the companies you have listed, interesting information Andy. One time instead of getting a tax return from the IRS, I left my money with them until the next year to see what the return on interest would be. It was about 17-18%, haven't done it again...but that was the highest return I've seen. ~ Will feature this!

    • SandyMertens profile image

      Sandy Mertens 7 years ago from Frozen Tundra

      Another good one!