Investing for Retirement

High Yield Investments – For Real
I’m not talking about the 3% yield on a Dow 30 Blue Chip. This is 10% we’re talking about.

What I’m referring to is stocks, ETFs and closed-end mutual funds that return 8% or more. My uncle, who is an astute investor, once told me that dividends are for old men. Well, some old men do alright. Investing in high yield investments is especially beneficial for those with a self-directed IRA since you pay no taxes. In order to do this, you can simply send a check to the likes of Ameritrade or E*Trade and open an account for a Roth/Traditional IRA, subject to income and investment amount limitations. But back to some high yielders. Many of these are in the commodities business. In some cases, they allow for some nice international exposure. In addition to the high yield benefits, commodities are not strongly correlated with the U.S. stock market. So, in a year where the market crashes 20%, your holding may break even or even increase…and then give you 8-10% to boot. So, here are some options:

PCU (Southern Copper) is yielding around 10%. And it’s been on fire. The expansion of the developing world has generated an enormous appetite for copper. It doesn’t sound sexy. But it is. If you got in a year ago, you’d have doubled your money by now. It is volatile, so watch out. But the correlation coefficient with the U.S. market is less than 0.5. Great diversifier.

IAF (Aberdeen Australia Fund) is yielding close to 10%. It represents Australian equities and has been a nice, steady performer, paying the dividends monthly.

When researching your own high yielders, a few things to watch out for. The yield quoted by the likes of a Yahoo Stock Screener may not be accurate, or may be representative of a stock that just underwent a precipitous decline, like NEW (New Century Financial). After the collapse of the sub-prime market, NEW will likely cut their dividend; a 40% yield is not realistic or sustainable. Markets are efficient. If this were truly a 40% payout, enough investors would pile in to increase the stock price to lower the yield to the low teens. I’d be skeptical of anything over 12%. Another thing to look for is steady or increasing payouts. Some instruments may have just payed out a giant amount in December and a screener lists it as a high yield when the end result is you hanging on to a stock for another full year only to get a minimal payout. As cited earlier, IAF pays a nice monthly dividend. There’s no mystery there.