Income Investing Will Boom

March 19th, 2008

We all know the baby boomer’s are going to begin entering retirement.  While there are many different styles of investing, I believe that when one enters the retirement stage of life, Income Investing is by far the best.  Investing in companies and bonds that offer high dividend yields can prevent one from being forced to start living off the capital in the portfolio.  Nothing would suck more than outliving your portfolio and winding up a 85+ year old with no money and a big burden to your children or your country. 

Finding high dividend yields will probably become increasingly hard.  Why?  As the boomer’s enter retirement they will most likely start searching for high yielding investments in large numbers so they can afford retirement.  As the demand for these high dividend yielding investments increases, so too will the price of those investments, meaning that dividend yields may decrease.  There is a wild card… perhaps many CEO’s will realize that investor’s are looking for companies with high dividends and maybe more companies will begin offering dividends so they can lure investment capital.  I hope this happens and I’m sure it will to a degree, but I don’t think it will happen in large numbers. 

I do like to invest for growth in a companies stock price, but I also want to be paid as an owner.  Why should anyone own a company?  To make money!  Too many public companies fail to issue dividends, instead telling their shareholder’s that they are going to put all that money back to work to grow the company and it’s share price.  This probably makes it easier for CEO’s and executives to grow the bottom line and get those big bonuses.  But, as an owner, and while I LOVE growth in the stock price, I still want to be paid a portion of earnings.  It doesn’t have to be a high portion, but I should be paid something. 

There are benefits to increasing the stock price as opposed to issuing dividends.  Obviously the company will ultimately be in a better financial position if it isn’t giving away its earnings.  It will have more options to grow and compete.  Heck, as long as you don’t sell the stock frequently, the paper gains over a period of 10+ years can all grow tax free.  Yes, you will pay taxes when you sell the stock at a gain, but as long as you don’t sell it, you pay nothing.  Dividends are taxable, but at a lower rate (at least in my country).  So while I do like and understand why many companies don’t offer dividends, I still believe a company that is profitable and has a healthy balance sheet should give at least a SMALL dividend.

8 High Yielding U.S. Stocks  

Harvest Energy Trust (HTE) 15.20% - Oil & Gas

GSC Investment Corp (GNV) 16.30% - Asset Management

Oceanfreight Inc. (OCNF) 16.20% - Shipping

Penn West Energy Trust (PWE) 15.00% - Oil & Gas

Pengrowth Energy Trust (PGH) 14.80% - Oil & Gas

Babcock & Brown Air (FLY) 14.20% - Leasing Aircraft (long term leases)

Omega Navigation (ONAV) 14.10% - Shipping

Terra Nitrogen (TNH) 14.10% - Agricultural Fertilizers

There is a common theme when looking through the companies that offer high yields.  Almost all are in the Real Estate Investment Trust sector or are Oil & Gas Income Trust’s (Canadian).  Just remember that Canadian Income Trusts (with the exception of REITs) will have to change structure within the next several years and they will be taxed.  Another common theme is the sheer number of shipping companies that offer high yields.  Shipping has been around FOREVER, and unless air freight were to significantly decrease, it looks like it will be around for a while longer.

Also remember, you don’t have to go with a high yielding stock.  There are plenty of stable companies that offer steady dividends like Procter & Gamble (PG) 2.10% which has been paying dividends for over a hundred years.

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