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Why I’m a huge fan of high yields from shares

Young lady working from home office during coronavirus pandemic.

Generally speaking, there are three core ways for investors to invest their money. First, they pay a financial adviser or fund manager to do this for them. Second, they capture long-term market returns by investing in low-cost index trackers. Third, they build a personal portfolio of hand-picked shares, as I do. And I specialise in investing in stocks that offer high yields.

What are high yields?

A number of listed-company shares pay cash dividends to their shareholders. These cash payments are usually made quarterly, half-yearly, or yearly. For me, these payouts are a crucial part of the long-term returns I earn from owning UK shares.

Now my first challenge is that most of the stocks listed on the London Stock Exchange don’t pay out any dividends. Usually, this is because these companies are loss-making, or prefer to reinvest their earnings to boost future growth.

Fortunately, almost all member companies of the elite FTSE 100 index do pay dividends to shareholders. As a result, the cash yield of the blue-chip index is around 3.8% a year. Not bad, but as this is an average, it can be beaten.

As for me, my favourite shares offer high yields — that is, market-beating cash returns producing higher ongoing income than most stocks. Thus, I’m an old-school value/dividend/high-yield/income investor. Sometimes, this can be a ‘boring’ approach, but that suits me just fine at my age (55 this month).

One big problem with dividend investing

My worst nightmare as a dividend investor is when listed companies get in trouble. Often, they decide to cut or cancel their share dividends to preserve cash. This means that my dividend income from these struggling stocks dives or even goes to zero.

Alas, when companies do axe their dividends, their share prices can plunge. Indeed, this has happened to me three times in the past six months (involving one FTSE 100 property stock and two FTSE 250 shares). In one case, when a company scrapped its dividend, its stock crashed by almost a quarter that day. Urgh.

Now for my bonus kicker

Though I’m a dividend investor, high yields make up only part of my investing returns. Over time, stock markets tend to rise as the global economy grows. Hence, my other long-term reward comes from capital gains.

I generate capital gains by selling shares at prices higher than I paid for them. For example, if I were to buy £2,000 of shares and later sell them for £3,000, then my capital gain would be £1,000. And in my experience, the capital gains from holding shares over decades can be remarkable.

Of course, the taxman eagerly waits to seize part of my dividend income and capital gains. But it’s possible to reduce this burden by investing in legal tax shelters, such as pensions and ISAs.

Finally, the FTSE 100 has jumped by 13.8% over the past 12 months. Despite this rise, I still regard this index as undervalued, both in historic and geographic terms. Also, I see deep value hidden in various Footsie sectors, including asset management and insurance, banking, oil and gas, mining, and telecoms.

In short, I’m happy to keep on buying FTSE 100 stocks for their high yields, most likely until I die!

The post Why I’m a huge fan of high yields from shares appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.