They say you're supposed to split your savings based on how old you are.
So if you are 65-years-old, 65% of your savings should be in safe investments like treasuries, bonds or a savings account.
Let me explain...
The yield on the S&P 500 is a paltry 2.1% even though large U.S. companies are sitting on a record net cash position and earnings are at or near all-time highs.
Meanwhile, the U.S. Federal Reserve has pushed its foot firmly onto the economy's accelerator, lowering short-term interest rates to near 0% and embarking on two rounds of quantitative easing to push down long-term rates, with a third round right around the corner.
While ultra-low rates may have made it cheap for qualified borrowers to borrow money, they're also punishing savers. Yields on most savings accounts and certificates of deposit are well below 1%, and the picture isn't much better overseas. Yields on government bonds in the UK, France, Germany and the Netherlands continue to hover near record lows.
Against that backdrop, it's no wonder investors are eager to pick up shares of companies offering high yields, and many see high dividends as a sign of a company's safety and stability.
But buyer beware: Investors who simply search for companies offering the highest dividend yields are taking on far more risk than they might imagine.
Consider that back in 2007, a screen for U.S. stocks offering the highest potential yields would have revealed a number of financials and mortgage real estate investment trusts (M-REITs) offering payouts well into the double-digits. Many of these companies have since slashed their payouts, filed for bankruptcy or no longer exist as independent firms.
You see, dividend yield is calculated by dividing a company's annual dividend per share by its price per share. That means there are two ways a stock's dividend yield can rise: the price of the stock falls or the annualized dividend rises.
Many of the M-REITs and banks that made the list of high-yield stocks in late 2007 and early 2008 fit into the "falling stock" category.
In most cases, these companies' shares fell before they cut their dividend, as investors sensed trouble and bailed out of the group. In effect, these companies had high yields for the wrong reason.
Jumping forward to today, and you can find a handful of companies that offer high yields for the right reason. These firms have a long history of raising their payouts each year.
Many businesses are able to raise their dividends in a strong economic environment, but only the most consistent companies are able to boost their payout straight through economic downturns.
While there are certainly some quality companies offering yields of 8% to 10% or higher, many shaky companies pay higher yields because investors are pricing in a significant risk of a dividend cut.
And nothing brings an income stock crashing to Earth faster than a major payout cut. One of the most effective ways to spot a sustainable dividend and to avoid the high-yield, high-risk traps is to look for firms that have consistently raised their dividends over the long term.
With these points in mind, and since I focus on international companies in my High-Yield International newsletter, I searched for international stocks trading as ADRs on U.S. exchanges, looking for stocks offering a dividend yield of 4.5% or higher that have boosted their payout at a 7% annual pace or better over the past five years.
This five-year period includes the severe economic downturn of 2007 to 2009; any company that continued to boost dividends through that period must have a business model that is reasonably resistant to economic cycles. I further eliminated firms that show high dividend growth solely because of a one-off special dividend.
To weed out companies showing a high yield due to significant price declines, I eliminated any stock that has not returned at least 7.5% so far in 2012, including dividends.
Here are the results:
Risks to Consider: Some of these companies in this list are not going to be as good as others. A number of catalysts could effect these companies negatively. You should research each stock individually to ensure it's the right investment for you.
Action to Take --> I personally like National Grid (NYSE: NGG) and SSE (OTC: SSEZY). Both are solid utility companies that have consistently increased dividends. Their ability to manage through tough years like 2007-2008 proves the value of their diversified business mix and makes the stock a solid buy.
P.S. -- If you're tired of settling for paltry yields on U.S. Treasuries, you don't have to settle for the limited world of U.S. stocks to get the income you need. I've put together a special report that explains how you can find some of the highest -- and safest -- yields in the world. Go here to learn more.
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