High Yield Dividends

Achieve high dividend returns with high-yield shares


What are high yield dividends?


High Yield Dividends are above-average dividends. In addition to high yield corporations that pay higher dividends than other companies, issuers also issue high yield bonds as high-yield bonds and high yield funds. All securities of the High Yield class are characterised by higher yields than investors can achieve with other financial instruments. For this reason, high yield dividends are particularly important during periods of low interest rates. In order to obtain a good net yield, the investors must be ready to enter a increased risk and to accept also losses with the investment of funds.

In addition to shares, bonds and funds, high yield securities also include a Real Estate Investment Trust (REIT), a Business Development Company (BDC) and a Master Limited Partnership (MLP). A REIT is a listed company that buys, sells, rents and leases real estate. By managing the properties, a REIT generates profits which are largely paid out to investors due to special tax conditions. A BDC is an American investor listed on the stock exchange that finances small and medium-sized companies and start-ups. A Master Limited Partnership is also a US company. It is a limited partnership in an energy supplier that is publicly traded on the stock exchange.


How do companies generate high yield dividends?


Investors can achieve a dividend of 10 % and more with high yield shares. American corporations in particular are often required by law to pay >compulsory, monthly or quarterly dividends to their shareholders. In order to make the payments possible, the companies distribute almost the entire profit they have earned between two distribution dates. The frequent payouts can result in a dividend of more than 10% per year for investors. Other companies in the USA are forced by law to pass on up to 90 % of their profits to the shareholders. As a result, investors can expect dividends of between 10% and 13% p.a..

In addition to paying out profits to shareholders, there is another reason why high yield companies promise high profits. In many cases it concerns stock exchange-listed public limited companies or limited partnerships, which profit from special tax advantages. American companies in the legal form of a Master Limited Partnership only have to pay tax on a maximum of ten percent of their profits in order to promote the country's energy supply. Real Estate Investment Trusts are exempt from corporate income tax and trade tax and tax their income only at the investor level. The companies pass these tax advantages on to the investors in the form of High Yield Dividends.


Pros and cons for investors


The great advantage of high yield dividends lies in the high yield that investors can achieve in a short time. Therefore some High Yield papers should be in each well sorted Depot. The depot must be however observed regularly, since High Yield securities can exhibit large price fluctuations. These are usually shares or bonds of companies with a low or poor credit rating. Therefore the investors must be conscious that they enter the risk to lose money with the purchase of the papers. With a High Yield corporation the price of the shares can worsen strongly from the one to the next dividend distribution or the company must even announce insolvency and the shares become worthless. Therefore the investors must constantly observe the course of the price, in order to sell the papers before a total loss fast again.

If the share price of a high-yield corporation continuously deteriorates, investors must calculate whether the investment will still yield a profit. As soon as the percentage loss from the price decline exceeds the amount of the dividend, the shareholders suffer a loss and ownership of the securities is no longer worthwhile. In the event of a sale, order commission and other fees from securities trading incur costs which additionally reduce the yield.


Consider the rating of high yield companies


In order to assess what the bondness of a company with high yield shares looks like, it is advisable to take a look at the assessment of rating agencies. Well-known agencies such as Moody's or Standard & Poor's classify companies into different risk classes, which they mark with letter combinations. The most reliable debtors receive the AAA rating, while companies with a worse credit rating are designated with the letters B or C. The most reliable debtors receive the AAA rating, while companies with a worse credit rating are designated with the letters B or C. The most reliable debtors receive the AAA rating. Operations with a high yield dividend often have a rating of BB+ to BBB- or worse. The lower the rating, the greater the risk that the share price crashes or that the securities become completely worthless.

If a company pays high yield dividends from reserves or corporate assets, investors should also closely monitor price developments. A high dividend is worthless if it is eaten up by the price loss. A financial investment in High Yield shares must be examined therefore constantly and the investors must shift their depot with course fluctuations fast, in order to avoid losses.