Image source: Getty Images
The age at which one invests can have a significant impact on which investment strategy it might make sense to use. Individual risk tolerance is also important. For example, someone in their thirties with a stable income and limited financial obligations is in a different boat than a retiree in their sixties with lots of bills to pay. High-yield investing in UK stocks can generate significant dividend streams, but it can also carry a lot of risk.
So wanting to buy stocks to try to build my wealth long term, could high-yield investing be a way to do it?
Stocks are not bonds
A dividend yield is an expression of the annual dividend income I expect to receive as a percentage of the price I pay for it.
For example, diversified energy it is trading at around £1.07 right now. Its dividends in the coming year are pegged at around 14.5 per share. That means the expected dividend yield if I buy Diversified for my portfolio today is around 13.5%.
mathematics and the market
Mathematically, that return sounds attractive to me. But stocks are not like bonds or savings accounts. UK government bonds and savings accounts at major banks are very likely to pay interest in line with what they’re supposed to (although there can be no absolute guarantees).
Actions are nothing like that. A company can decide whether or not to pay a dividend. You can cut it after decades of never doing it, like Shell it did in 2020. It could cancel it entirely, as UK banks did in 2020 due to regulatory obligation. Or you could make a business decision not to pay dividends, because your earnings are falling or simply so you can spend your leftover cash in other ways.
Consider Diversified. It operates more than 60,000 aging gas wells. They could be expensive to dismantle. Gasoline prices could fall. You could put money into Diversified stock today and end up not getting a dime in dividends.
High Yield Investment
So why bother buying stocks, if dividends may not materialize and the capital investment is at risk?
If I were already in my sixties, I might as well focus on lower risk investment classes. But as it is, I still have several decades to try to accumulate wealth before I retire.
Stocks have downsides, but the upsides can be substantial. Perhaps Diversified will continue to increase its dividend annually, as it has in recent years, and could earn substantial amounts each year just by owning its shares.
quality hunting
But if I wanted to aim for high returns, I would still focus on high quality. That would be true at any time in my life.
A year or so ago, home builder Khaki and insurer Direct line had double-digit percentage returns. Since then, Persimmon has cut its dividend. Direct Line canceled your payment in full last month.
Clearly double-digit performance can be a red flag. However, some companies have great business models and generate large free cash flows, but their shares are cheap.
I believe that high-yield investing could help me build wealth. But whatever the performance, I would also focus on buying quality companies.
var config = {
apiKey: ‘1ed121d592e04642d57912bb369ef696621661a3’,
product: ‘PRO_MULTISITE’,
logConsent: false,
notifyOnce: false,
initialState: ‘NOTIFY’,
position: ‘LEFT’,
theme: ‘DARK’,
layout: ‘SLIDEOUT’,
toggleType: ‘slider’,
iabCMP: false,
closeStyle: ‘button’,
consentCookieExpiry: 90,
subDomains : true,
rejectButton: false,
settingsStyle : ‘button’,
encodeCookie : false,
accessibility: {
accessKey: ‘C’,
highlightFocus: false },
onLoad: function () { // hide Cookie Control recommended settings button.
var recommendedSettingsButton = document.getElementById(‘ccc-recommended-settings’);
if (recommendedSettingsButton) {
recommendedSettingsButton.classList.add(‘hide’);
} },
text: {
title: ‘Privacy Notice’,
intro: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
necessaryTitle: ”,
necessaryDescription: ”,
thirdPartyTitle: ‘Warning: Some cookies require your attention’,
thirdPartyDescription: ‘Consent for the following cookies could not be automatically revoked. Please follow the link(s) below to opt out manually.’,
on: ‘On’,
off: ‘Off’,
accept: ‘Accept’,
settings: ‘Cookie Preferences’,
acceptRecommended: ‘Accept Recommended Settings’,
notifyTitle: ‘Privacy Notice’,
notifyDescription: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
closeLabel: ‘Save Preferences and Close’,
accessibilityAlert: ‘This site uses cookies to store information. Press accesskey C to learn more about your options.’,
rejectSettings: ‘Reject All’,
reject: ‘Reject’,
},
branding: {
fontColor: ‘#fff’,
fontFamily: ‘Arial,sans-serif’,
fontSizeTitle: ‘1.2em’,
fontSizeHeaders: ‘1em’,
fontSize: ‘1em’,
backgroundColor: ‘#313147’,
toggleText: ‘#fff’,
toggleColor: ‘#2f2f5f’,
toggleBackground: ‘#111125’,
alertText: ‘#fff’,
alertBackground: ‘#111125’,
acceptText: ‘#ffffff’,
acceptBackground: ‘#111125′,
buttonIcon: null,
buttonIconWidth: ’64px’,
buttonIconHeight: ’64px’,
removeIcon: false,
removeAbout: false },
necessaryCookies: ( ‘wordpress_*’,’wordpress_logged_in_*’,’CookieControl’,’PHPSESSID’,’fivc’,’fivs’,’fivp’,’Ookie’,’Fool_subinfo’,’_gads’,’_gid’,’_gat’,’_ga’,’__utma’ ),
optionalCookies: (
{
name: ‘Sharing’,
label: ‘I would like content tailored to my personal preferences.’,
description: ‘We work with advertising partners to show you ads of products and services you may be interested in. You can choose whether or not to have ads delivered in a personalised way by setting this option. You can return to review this setting at any time by clicking the "C" logo in the bottom left corner of any page.’,
cookies: ( ‘_ga’, ‘_gid’, ‘_gat’, ‘__utma’, ‘_gads’ ),
onAccept: function () {
// Add Facebook Pixel
!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
n.queue=();t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)(0);
s.parentNode.insertBefore(t,s)}(window,document,’script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘901682110316659’);
fbq(‘track’, ‘PageView’);
fbq(‘consent’, ‘grant’);
// End Facebook Pixel
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, true ) ;
},
onRevoke: function () {
fbq(‘consent’, ‘revoke’);
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, false ) ;
},
recommendedState: ‘on’,
lawfulBasis: ‘consent’,
},
),
statement: {
description: ”,
name: ”,
url: ‘https://www.fool.co.uk/help/privacy-and-cookie-statement/’,
updated: ”
},
};
CookieControl.load(config);
