Here at the Motley Fool, high-yield shares are a firm favourite. To be sure, oil and mining stocks, small caps and index trackers have their fans, too. But, undeniably, the charms of high yield have perennial appeal.
Yet it’s safe to say that some investors look down on high-yield shares as, well, boring. There’s none of the excitement of a racy gold explorer, they smirk.
Where’s the thrill, they ask, in buying into a blue-chip such as Telstra Corporation Limited (ASX: TLS), ASX Limited (ASX: ASX), Wesfarmers Limited (ASX: WES) and then simply sitting back and just banking the dividends?
Well, that’s true, high-yield blue chips aren’t exciting — or at least, as investors in QBE Insurance Group Limited (ASX: QBE) will acknowledge, aren’t exciting most of the time.
Despite this, I reckon that there are no fewer than five compelling reasons for buying high-yield shares. And, yes, excitement isn’t one of them.
First and foremost, of course, there’s that glorious yield. Just think: 5% or so and that’s before franking credits. You don’t want to chase yields too high, of course. Very high yields may indicate a share price that’s been driven down by worries over dividend sustainability, or other concerns. David Jones Limited (ASX: DJS) has suffered such a fate. But anything a couple of percentage points above the S&P/ASX 200 average (around 4.7% currently) should be safe.
Capital gains, from an income share? Indeed: it can – and does – happen.
Often, yields are higher than the S&P/ASX 200 average because shares are temporarily beaten down by short-term concerns over something or other. QBE Insurance Limited (ASX: QBE), for instance, is firmly into high-yield territory for just such a reason. Woolworths Limited (ASX: WOW) is another example. And when these concerns dissipate, and the share price rises again, investors find themselves in the happy position of having locked in a high income – and a decent capital gain.
Time and again, studies of the stock market’s total return over long periods show that something between two-thirds and three-quarters of overall returns come from dividends.
Not dividends turned into income and spent, of course, but dividends reinvested in more dividend-earning shares. To you, does that sound like a strategy of buying high-yield shares and then reinvesting the higher-than-average dividends?
It does to me.
Several of these high yielding companies offer Dividend Reinvestment Plans (DRPs) where you can choose to receive shares instead of a cheque in the mail with no brokerage and sometimes at a small discount to the current share price.
In the nature of things, some of the ASX’s fattest and tastiest yields are in the upper reaches of Australia’s flagship ASX 100 index.
No fast-growing minnows, these are Australian behemoths (over $5Bn market capital) — think, Stockland (ASX: SGP), Sydney Airport Holdings Ltd(ASX: SYD), Coca-Cola Amatil Limited (ASX: CCL) and Sonic Healthcare Limited (ASX: SHL) — with robust business models and a long-term sustainable stream of profits.
Granted, they’re not going to grow ten-fold overnight; but, equally, they’re not going to go pop, either.
Buy a corporate bond or any other fixed-interest investment, such as term deposits — and you know to the penny what you’re going to earn.
Many high-yield shares have an enviable track record of not just paying a decent dividend but increasing it over time, too, and at a rate that’s comfortably above inflation, as well.
The result? A decent income, and an income that is rising in real terms, too.
Foolish bottom line
As I said at the beginning, high-yield shares aren’t the most exciting business in which to invest – but who needs excitement when the alternative is cold, hard cash.
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Motley Fool contributor Mike King owns shares in ASX, QBE & Woolworths. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.
A version of this article written by Malcolm Wheatley, originally appeared on fool.co.uk. It has been updated by Mike King.