Income investing can feel more satisfying than growth investing because as an investor you can target investments with particular income profiles and yields and have a clearer expectation of what your portfolio will provide over the coming year. Imagine how satisfying it would feel to put your money to work such that you could earn an 8% yield from your investment portfolio.
A dividend investor can screen the market looking to buy shares with minimum dividend yields. Therefore, disasters aside, they can plan to collect that dividend yield over the next twelve months from their portfolio
In contrast, a growth investor merely buys and hopes that the markets take a more favourable view on the value of the company over the course of the next year.
What is a normal dividend yield targeted by investors?
To understand investing norms, it’s helpful to look at the average dividend yields on offer in different stock markets.
At the date of writing, the FTSE 100 index of companies has a dividend yield of 3.54%. (Source: DividendData.co.uk)
Over in the US, the S&P 500 index has a yield of just 1.33%. This is because US companies tend to favour profit retention and buy share buy-backs over dividends. The largest companies, such as the FAANG companies, tend to pay very low dividends which drags down the average of the index.
So, without applying a dividend-seeking approach, a UK investor could already expect to receive a dividend yield of 3.54% just by investing in the FTSE 100 through a cheap equity ETF.
Therefore investors looking to receive a yield higher than 3.5% will need to make changes to their portfolio to focus on high-paying dividend shares.
How to increase the dividend yield of your portfolio sustainably
To invest the dividend yield of your equities, you’ll want to build your own portfolio of high-dividend shares.
The ordinary principles of diversification apply as normal. So you’ll want to spread your equity allocation across at least 20 different companies to partially insulate the portfolio from factors impacting individual companies.
One place to hunt for companies is to Google a listing of the FTSE 100 and S&P 500 indexes, showing the dividend yield of each constituent company. Sort the listing to bring the highest yielding companies to the top and begin your research.
Investing immediately in the top ten companies with the highest dividend yield is known as the ‘dogs of the FTSE’ or ‘Dogs of the Dow’ strategy. Simplistically, these companies might appear to offer the best dividend yields, but their status at the top of these rankings may suggest they’re not the best companies to invest in now.
Why is this? Well, the data which drives dividend yield calculations are often the latest dividend paid, and not the next dividend expected. Therefore, if a company pays a reasonable dividend and then experiences some terrible news that sends its shares into a nosedive, its dividend yield will have increased substantially.
This yield % will often be short-lived because investors presumably expect that profits will fall and so will dividends. Therefore, an announcement may be on the way which explains that dividends will be cut in the future.
This is why good company and share price research is needed to ensure you can spot this pattern of events, and exclude companies that have flattering (but temporary) yields. Instead, you’ll want to find companies that have consistently paid a high yield for multiple periods.
It’s a slow process that you may find to be frustrating. You may reach several dead ends before you eventually find a great company to invest in.
Investing for an 8% yield – real examples
Chasing an 8% yield is a step above ordinary dividend growth investing, which sees investors target yields of between 4% – 6%. Plenty of companies offer dividends within this range. When searching for higher returns, investors will find that their choices are much more limited as therefore you may need to explore other geographical markets to fill a diversified portfolio.
Companies that pay dividends in excess of 8%
Here is a quick list of UK companies that pay 8%+ dividend yields at the time of writing. This is not a recommendation to invest and we strongly recommend that you perform your own research before investing in shares.
- BHP Group (Mining) – 12.07%
- Rio Tinto (Mining) – 10.54%
- Persimmon (Construction) – 9.35%
- Imperial Brands (Tobacco) – 8.54%#
In the US stock market, you’ll struggle to find individual stocks paying over 8% in dividend yield. Here are some notable examples of US companies with high dividend yields at the time of writing:
- Iron Mountain – 5.65%
- AT&T – 4.4%
- Chevron – 5.5%
Looking beyond dividends
Investing for 8% income yield doesn’t limit you to dividend investing books. There are other high-yielding investment types that you could use to diversify your portfolio.
- Preference shares
- High yield (or ‘Junk’) corporate bonds
- Peer to Peer lending platforms
- Real Estate Investment Trusts (REITs)
Preference shares are shares that offer a fixed or capped ‘preference share dividend’ which behave more like a bond. Investing in preference shares is only suitable for long term investors because the bid-ask spread on these thinly traded instruments often incurs a one-off investment cost of 2 – 3%. Learn more about investing in preference shares.
High yield corporate bonds, also known as junk bonds, are debt instruments issued by companies with a less-than-stellar credit rating.
You can invest in this asset class through ETFs that specialise in high yield bonds, although the risk of each fund varies. For example, the iShares iBoxx $ High Yield Corporate Bond ETF only yields 3.85%, which actually betrays the fact that this fund doesn’t aim for the riskiest end of this asset class. That being said, compared to the 1.5% yield to maturity of the vanilla iShares Global Corp Bond UCITS ETF, you can begin to see the premium return the fund delivers.
Investing in corporate bonds directly is not feasible for retail investors because of the high minimum trading lot sizes. Therefore you’ll need to scan the market for the best funds to invest in.
Peer to peer lending platforms provide access to personal and business debt, which can produce an attractive yield. A borrower with an excellent credit rating will usually pay 3-4% interest on an unsecured loan. Therefore to target an 8% return, you will need to invest in loans to lower creditworthy groups.
Peer to peer lending platforms such as Assetz Capital allows you to lend to businesses, which often results in higher rates of interest. Their functionality allows you to handpick which loans you want to invest in, which allows you to curate a portfolio of loans that could result in an 8% annual return. Be aware that you’ll need to factor in the risks of defaults on loans, which are common and do occur. Defaults could knock several percentage points off your return in a normal year in the business loan sector.
Real Estate Investment Trusts, known as REITs for short, are publicly traded companies that invest in real estate development or rental property and distribute the yield to investors each year. These don’t yield 8% in the current environment, but in certain market conditions, such as in the wake of a property price crash, these leveraged vehicles often offer high yields relative to the broader stock market.
Examples of some of the best known UK REITs include British Land (5% yield), Land Securities Group (5% yield).
These yields were correct at the time of writing but will be subject to change.
Is chasing a high yield worth it?
Investing for an 8% yield is particularly notable because this is a return higher than the average total return of the stock market. (And that measure includes dividends and capital growth).
So in other words, investors need to find investments that have a sustainable expected return that exceeds the average.
Does this mean that dividend investors looking for an 8% return need to be a ‘better stock picker’ than average, or experience ‘more luck’ than the average investor? Not quite.
It may come as unwelcome news, but if you’re searching for a yield higher than the average stock market return, then you will need to take on more risk than an average portfolio of shares.
Higher returns are available, but only from companies that have greater risks.
This should give you pause for thought. It’s worth reflecting on why you want to become an income investor, and why an 8% return is important.
If you are drawn to income investing because it feels more stable and gives a more reliable return that you can count on each year, then high yield investing might not be for you. This description might apply to low yield dividend investing (3% – 4%) which will involve investing in companies with strong credit ratings and stable businesses.
The types of companies which will feature in an 8% dividend yield portfolio will be highly cyclical businesses, businesses undergoing a period of change, or those which potentially could find themselves in financial distress. This is not a portfolio that you could ‘rely upon’ for a dividend.
Indeed, the trade-off for shooting for such a high return is that you won’t actually hit 8% every year. If you cannot accept this reality then perhaps high yield investing isn’t for you.