Portfolio Income: Trading Quality Stocks Vs. Longer-Term Positions In REITs And Other High-Yielding Securities
Published Jul 28, 2020 on Seeking Alpha

Seeking AlphaPortfolio StrategyPortfolio Income: Trading Quality Stocks Vs. Longer-Term Positions In REITs And Other High-Yielding SecuritiesJul. 28, 2020 3:32 PM ET|| Includes: DEI, DGI, FMNB, HGH, HIG, IPG, KBAL, MDC, RTN, SJM, SNAby: Risk Research IncRisk Research Inc Quality CompoundersEntry/exit probability analysis for public companies of exceptional qualitySummaryMost companies yielding over three percent in the current near-zero interest rate environment involve substantial hidden risk.
An alternative to Dividend Growth Investing is trading high-quality stocks. This approach involves less risk and offers greater upside potential.
In the current environment, most stocks yielding more than 3%, with reasonable dividend coverage by free cash flow, and dividend growth, are banks. That’s a problem.
As investors, we are in new, uncharted territory. Near-zero-interest rates change everything. Whether we realize it or not, they force us to incur more risk. They boost valuations and thus cause asset bubbles. The need for income by our rapidly-growing retired population further contributes to risk. Companies, realizing that high dividends generate interest in their stock, increase payouts. When a business can’t support its dividend requirement out of free cash flow, or when the company needs that free cash flow to support growth, it borrows to cover the shortfall. Only the highest-quality companies can grow without incurring additional debt.
Rather than chase dividends in a low yield world, I’ve developed an algo that allows me to buy and sell shares in quality companies, and, in the process, generate income. In favor of this approach, and it's admittedly not an absolute truism, but in general, high-yielding companies that fund dividends out of free cash flow tend to be low growth. This is because companies with significant growth prospects tend to limit or avoid paying dividends in order to have sufficient cash to fund growth (increased inventory,... Read more