5 Reasons To Buy High-Yield Shares

Published in Investing on 16 March 2012

No wonder these picks are so popular.

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 oil explorer, they smirk.

Where's the thrill, they ask, in buying into a global blue-chip such as GlaxoSmithKline (LSE: GSK), BAE Systems (LSE: BA) or BP (LSE: BP), 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 post-Gulf of Mexico investors in BP 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.

Income

First and foremost, of course, there's that glorious yield. Just think: 5% or so, at a time when bank rate is 0.5%, and most savings accounts are paying a negative real rate of interest.

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. Cable & Wireless Worldwide (LSE: CW) would be an example of this, for instance. But anything a couple of percentage points above the FTSE average should be safe.

Capital gains

Capital gains, from an income share? Indeed: it can -- and does -- happen.

Often, yields are higher than the FTSE average because shares are temporarily beaten down by short-term concerns over something or other. Tesco (LSE: TSCO), for instance, is firmly into high-yield territory for just such a reason. Aviva (LSE: AV) is another example.

And when these concerns dissipate, and the share price rises again, investors find themselves in the happy position of have locked in a high income -- and a decent capital gain.

Total returns

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. No wonder DRIP plans in high-yielders such as British American Tobacco (LSE: BATS) perform so well.

Blue-chip security

In the nature of things, some of the FTSE's fattest and tastiest yields are in the upper reaches of London's flagship FTSE 100 index.

No fast-growing minnows, these are global behemoths -- think Shell (LSE: RDSB), Unilever (LSE: ULVR) or Vodafone (LSE: VOD) -- with robust business models and a long-term sustainable stream of profits.

Granted, they're not going to 10-bag overnight; but, equally, they're not going to go pop, either.

Rising dividends

Buy a corporate bond or gilt -- or any other fixed-interest investment, such as NS&I certificates -- 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.

> High-yield shares form a key part of our new investing service called Motley Fool Share Advisor. Find out more here.

More from Malcolm Wheatley:

> Malcolm owns shares in GlaxoSmithKline, BAE Systems, BP, Tesco, and Aviva. The Motley Fool owns shares in GlaxoSmithKline, Unilever and Tesco.

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Comments

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ANuvver 16 Mar 2012 , 9:24am

VOD is a dividend machine and I'd almost buy at any price. However, the shares are suffering uncertainty at the moment as the muscles from Brussels attempt to flex over agreements between the top 5 European telcos.

ULVR's price is similarly sulking, aro pension restructuring.

I reckon both these issues will soon be resolved, but in the meantime entry points may look modestly more attractive for long-termers.

Disc: I hold both.

Hannibalis 19 Mar 2012 , 8:29am

You make a good case - in fact academic research supports this.

http://www.the-diy-income-investor.com/2011/09/dividend-puzzle-dividends-earnings-and.html

However, divididend payerscan be fickle - recently as many as 13% of dividend payers stopped or reduced dividends

http://www.the-diy-income-investor.com/2011/10/chopped-13-of-uk-dividend-payers-cut.html

Fixed-rate investment can pay twice the yield of most dividends - but is the risk greater? My own experience over several years is that fixed -rate has outperformed dividend equities.

Hannibalis 19 Mar 2012 , 8:29am

You make a good case - in fact academic research supports this.

http://www.the-diy-income-investor.com/2011/09/dividend-puzzle-dividends-earnings-and.html

However, divididend payerscan be fickle - recently as many as 13% of dividend payers stopped or reduced dividends

http://www.the-diy-income-investor.com/2011/10/chopped-13-of-uk-dividend-payers-cut.html

Fixed-rate investment can pay twice the yield of most dividends - but is the risk greater? My own experience over several years is that fixed -rate has outperformed dividend equities.

performer777 19 Mar 2012 , 5:22pm

The best dividend tool that i have come across is

http://www.dividendmax.co.uk

ne11y 19 Mar 2012 , 5:59pm

I am not sure VOD is a good example. I bought at £2.55 and had 20% "repossessed" in a share buy back at £1.30. I am still in the red 10 years later even including dividends.

jaizan 19 Mar 2012 , 8:02pm

Vodafone is a good example, it's just the market was mis pricing them at £2.55 & even more so when they were at £4.00.

A good business on a high PE is still a good business, it's just not a good investment (if the price is too high). At current prices, I think Vodafone is cheap enough to own.

performer777 20 Mar 2012 , 12:14pm

Vodafone look good at these levels. They are a recent addition to the DivMax trading portfolio and that does pretty well.

http://www.dividendmax.co.uk/portfolios/performance

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