High Income Investments: A Warning
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- Опубликовано: 4 дек 2023
- Yields are a seemingly easy to understand attribute of investments, making them a focal point for many investors.
The salience of yield is no secret to financial product manufacturers, resulting in products being manufactured and marketed based on their high distribution yields.
But distribution yields are not investment returns, they are not sufficient to assess expected returns, and, in the way that they are used to market financial products, often to unsophisticated investors, they can be misleading.
References: zbib.org/7ac95140522c4bf69d60...
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Thanks Ben. Ignore the haters; some of us really appreciate your valuable content.
This is the best comment.
Wait, what? Ben has haters? There are people on this planet that are that dumb?
Loving the juicy yields being put out by this channel lately, Ben.
Some people have just never learned to ask "is this too good to be true?".
Now you tell me! I was one of those "unsophisticated" investors that chased after juicy distribution yields and I learned on my own how dumb that was. Your videos are often incalculably helpful!
I'm glad you're back to making videos on your own channel.
1.5 years ago I found your channel through Andrei Jikh (of all people lol), and you showed me the light.
I'm now a happy, stress-free broad market index ETF investor rather than a degenerate gambler chasing junior mining stocks
Great video. Individual stocks are also guilty of this - I lost my shirt in high-yield stocks like AT&T where the dividend was manufactured by taking advantage of low-interest debt and accounting tricks.
Ben has a good video on this too! People chase dividend paying stocks not taking into account that you are almost always better off buying an index and selling shares when you want a distribution!
I have seen other dividend investors I've met telling me about ZIM, ORCC, or these other horrible CEFs. One guy told me about this CEF that paid 16%. The return has been -30% and I look at him like "you lost money! You didn't make 16%. You lost 14% of your worth." I'll keep the companies I have with a low dividend to FCF. It'll probably take longer but I want my companies to keep money to reinvest into the business.
Thanks for setting the record straight. These short videos are great!
I love them too, learned an invaluable lesson really quickly in every one of them so far. I prefer the deep dives but these shorts are excellent. Thanks Ben!
My favorite channel, thanks ben
Thank you Ben! that was a great video.
Good (GREAT AWESOME FANTASTIC) to have you back with even more videos in a shorter /simpler format.
I think there is something else worth of highlighting for people that is thinking "I'm not going to sell the stock, so, I don't care if its price goes down after I buy it, and because of that I only care about the yield": if the price goes down and the distribuition is a percentage of the price, then the distribuition is going to go down as well.
luis: If the price of a stock drops, with the dividend staying the same, the yield rises. Dividends or distributions are independent of the price of the underlying asset.
@@howardfriedman7077 not for covered calls ETFs (which are the main focus of the video).
Very timely! I work as a financial planner and just finished explaining this to my coworkers
Your coworkers shouldn’t be working in the field if they don’t understand this. Pretty common sense stuff.
@@jordanjames8864you will be surprised 🤣.
Glad you made this video. I've been watching Bloomberg/BNN during the day and ads are bombarding viewers with higher and higher yielding products. It's really obvious.that they are primarily targeting retirees (or those trying to retire early and focusing on creating an adequate dividend/distribution flow) who want more income out of their portfolio, and so we're not just seeing covered-calls or leverage anymore, but combinations of those now!
Unfortunately, I've found it hard to knock the idea through people's heads that total return is most important, because they mostly just want a combo of income flow and never having to sell units. So even if their ETF trails the underlying stocks in total return, as long as it doesn't crash in price and still provides a strong distribution flow then it is attractive to them.
Yup. BNN Bloomberg must love that ad revenue.
Thanks Ben..
Hey Ben, great video! ❤
Great video! I remember seeing what all the fuss was about with these types of stocks, then learning about NAV decay - kept me from ever investing a penny in such risky plays.
Nice video specifically addressing those super high dividend funds that have popped up in the last few years...especially JEPI since it's been out for a handful of years now we can compare to S&P500. Sure it gets a ~10% yield give or take, but in past ~3 years it has returned almost nothing while the S&P500 has returned around 50% in gains. It more than makes up for the difference in yield...
As Ben has taught us in past videos, one of the strongest predictors of a fund's performance is the fees. Low cost funds are often a better choice over high cost funds...
Bravo. Required viewing for the followers of Passive Income Investing and Beavis Wealth. Rarely do they discuss total return. They do believe that the covered call premiums are sufficient to cover the distributions and they still have upside potential. They don't understand ROC and view covered calls as a free lunch.
The PII follower portfolio reveals are particularly cringy
PII is such poor content, paid spokesperson for the high yield industry.
I've watched every RR and CSI and each time I squint to see the titles of those books back on the shelf. I know there's the book list on the RR website, but one day I'd love a video that shows the titles of those books! Or perhaps a list of the books on your shelf embedded in one of your video's "About" section.
After watching this video I think I have a very good idea of what a yield is not but still don't know what a yield is
A cash distribution from an investment.
dividends
Because he is just making click bait videos and saying dont look at yields, buy Voo or vti or schd , duh geez i might only live 15 more years and need cash now , smh
Yield % = share price / dividend per share
*Edit: dividend per share / share price = Yield %
@@goldenforge12Actually there are studies which show you can outperform these high yield funds if you just sell shares for income.
Great Video Ben - A little known but important issue. The problem of yield chasing becomes more problematic as rates go down as people reach for higher cashflows without understanding risk.
Yes, reaching for yield is a big problem, and is likely very expensive for investors.
You are a national treasure. Please keep up the good work
*international treasure ;)
I like these short videos, I can "almost" keep up! 😄
yes, still, he uses such out of touch language like "empirically"! Who talks like this in a video like this; he sounds is writing a research paper, when talks!
@trave7644 I think Ben is doing his best to dumb it down for us dummies. When it comes to investing, he's operating on a higher level than most of us........which I'm thankful for!
Great video
Ben's channel has the most juicy yields of all.
Terrific video
I just happen to sell my position in HYLD and this video comes up. XD Excellent as always
The thing a lot of income investors also don’t understand about these super high yield funds is they don’t increase their dividend and if they do it’s at a snails pace, and if they cut it then it’s substantial because the high yield is eating at the funds NAV, which is why these funds return on capital sucks because it’s essentially return OF capital. There’s large cap US equities out there…Home Depot, Visa, Mastercard, United Health, MSCI, Costco and Eli Lilly come to mind that have dividend CAGR’s of 15% plus per year while their share price is compounding at a rate exceeding the market average. But of course all a new investor is going to look at is how cheap is the share price and how high is the starting yield.
This is a very important alert. I didn't know that an investment could be marketed so deceptively. Yikes!
Great video Ben! On another topic: What is your opinion on the high ROE/"quality factor" ETFs that have come out? I'm in the US so I'm looking at QUAL and JQUA
MSCI’s quality factor, if I remember correctly, is measured using return on equity, debt to equity, and earnings variability.
Valuation theory suggests that expected future profitability should be related to expected returns. Return on equity uses net income which can be affected by one-time expenses such as extraordinary items. Research by Robert Novy-Marx (2012) shows that you get a better proxy for expected future profits if you move up the income statement to gross profits.
Once you control for the level of gross profitability, the variability of profitability contains little additional information about future profitability. Academic studies such as Fama & French (1992) also show that once you control for size and book-to-market, leverage contains little additional information about differences in average returns.
In short, the MSCI quality metric combines multiple signals which do not add any explanatory power to the model when size, relative price, and gross profitability are accounted for. Adding multiple signals together instead of using one clean signal may lead to less diversification and higher turnover for no additional benefit.
All that said, quality and profitability should give somewhat similar results. They are arriving at the same place, but profitability is more parsimonious.
I would tend to prefer a fund that is targeting multiple factors as opposed to a single factor like quality/ profitability.
Amen.
Excellent, thank you for these short vids. I'm trying to convince dividend investors of the facts. 😂. I'm hopeful they will watch these shorter vids.
Among companies, growing return on invested capital is everything. For investors, portfolio total return net of fees and taxes is everything.
Great video!! just saved me from some big potential mistake!
Good! I'd like to share some ideas with you . Use the number
Ive seen the same mentality in split shares, that were being bid up to huge premiums ! Most have returned to reasonable values when the distributions got cut !!
It would also be good to mention the return of capital (ROC)
Ben, this video lacks your usual clarity, but great point. If you spend $100k on a stock or mutual fund that pays 20% ($20k) but that asset drops 25% (-25k) in market value, then you are losing money (-$5k). Ironically, the yield may seem to go up, given that the denominator is lower.
There are a few shills on Blossom who need to hear this.
Ben, thanks for the juicy video. I have no idea where to ask you this question anywhere but here. So today December 20th, the stock market in North America at 3pm dropped suddenly, how does this happen? How do so many people or companies all sell at the same time of day? Dow dropped like 500 points from 3pm today to close. Hopefully you can help me understand there is not just one dude pulling down on a lever lol
I’m liking the shorter phone videos!
Let's see Ben Felix take on Adrian PII 😅
No contest, PII is garbage content in my humble opinion.
Couldn't agree more@@dividenddepot
Hey Ben, thanks a lot for all the free education you are providing. I have been also following the Rational Reminder podcast quite a lot as I find it extremely informative and educative. But I lack some of the fundamentals needed to fully understand the concepts you explain. Any recommendation on where I could start to learn fundamentals of investing? Thank you!
My personal order of recommended books from new to advanced:
new: Retire Before Mom and Dad
novice: The Psychology of Money
intermediate: Just Keep Buying
Advanced: In Pursuit of the Perfect Portfolio
Expert: The papers Ben includes on most CSI videos and white papers/research doc
-Not Ben, but hope this helps.
@@Omar-et7sb❤
@@Omar-et7sb Thank you very much. I'll start getting into this.
high yield = high NAV decay and taxes usually. I used to be a fan of "dividend growth" and covered call ETFs but it matches or trails total returns of an index fund that is more tax efficient. You can do low delta covered calls yourself once you have 100 shares of a liquid index fund anyways
As my homies hate income investing. In global low cost index funds ETFs we trust.
Nice video Ben, quick question. I know you strongly advocate for owning the market (low cost globally diversified funds, or low cost domestic total market funds) and that probably makes sense for most people.
However, unless risk premium is made up/inaccurate in some way, would it not make sense for a younger investor who is willing accept the risk to invest a larger than average portion of money higher up the risk curve?
For example, there's a small cap value fund available in my 401k plan, so I allocated 20% of my portfolio to it. This definitely makes me overweight small cap value compared to the total market index.
Nothing's guaranteed of course, but is it reasonable to assume my acceptance of higher risk raises my expected future returns over the next 40-50 years? If not, I don't understand why that's the case.
You may well be one of the people I talk about in this video (I am also one of those people): ruclips.net/video/4hSFzVoZkiA/видео.htmlsi=3zDNCHUEAmu4o2nQ
Good points, but the only fly in this ointment is that the excess returns might not happen until years 60-65, right after you die. Be aware that the statistical analyses supporting a tilt toward small cap value use over 100 years of data.
This is equivalent to saying "I can beat the market over the long term".
If you are young and not sure if you have enough information to beat the market consistently, then you're better off just buying an index fund and using the compounding runway provided by your age to build your wealth using guaranteed market return.
If you use your youth instead to try and beat market return over say the next ten years, there's an 80% chance you will actually underperform the market. So although you have time left to change strategy and make up losses, the critical thing you have squandered is the compounding advantage that young people have. You can't get that back unfortunately.
Ben would be on my Mt Rushmore of RUclips finance creators. Tina Turner even made a song about him..”simply the best”
Basically high dividend yield ETFs are a scam. If it sounds too good to be true it probably is
Scam means lies are involved. Their marketing is technically accurate because the advertised dividends are there, but significant losses to the portfolio is pretty much inevitable.
@@samsonsoturian6013 In the case of the covered call funds, it is not that losses are inevitable, it is that in rising markets gains are capped by call prices.
So the high-yield things underperformed in the past, well understood. But so have bonds or non-US market stocks. Yet, if we constructed a portfolio with a minor component of these underperforming assets, not only did they reduce volatility of the overall portfolio, but might have even increased the return in some cases, thanks to neutral/negative correlation and rebalancing. Has there been research done of how a mix of say SPX and XYLD performs relative to just SPX alone? I would not be surprised at all, if adding a little bit of XYLD and periodic portfolio rebalancing actually improved the overall return.
Rational Reminder videos are always great. Would love to see a video on how to evaluate a fund or at least figure out the total expected return.
I'd like to share some ideas with you . Use the number
I have a portion of my portfolio in HY not because of the yield but because they have a better valuation !
Ben, what do you think of EIT Canoe Income fund? I follow it for last 10 years and it seems to be doing a great job. It keeps the price more or less the same while paying around 10% yield for many many years. The portfolio holdings look also very compelling (to me at least). If you reinvest that yield when markets plunges you can get to a nice total return numbers. What's your view about it?
I was gonna ask the same question. To me that track record looks amazing!
I learned this the hard way… with QYLD.
I understand what you're saying. An equal weighted bank etf will outperform a bank covered call in the long-term. However if the covered call etf has no NAV erosion and you hold onto it with discipline like a bond to maturity aren't you guaranteed to double principal investment eventually?
Isn’t that like saying if I invest in an interest savings account I will eventually double my money? Yes, I will, in about 72 years. If such a CC etf existed, yes I will eventually double my money. But wouldn’t I be much happier doing it faster with the first ETF?
Any book recommendations?
Ben shooting at the dividend bugs. I personally like dividends so I can pay more taxes. As a matter of fact I only like non qualified dividends 😂
total returns got it thanks
Ha - never noticed the typo behind you til now. Isn’t the ticker AAPL-not APPL?
I think they're also targeting investors with a specific pessimistic view of the future, namely that we're going into a Japan-style stagflation situation with a flat market. A CC strategy therefore doesn't sell the upside, because there's no upside, so it's all free premium (surely contract writers don't adjust premiums based on risk, right?). There's an episode of the RR podcast where you covered a survey about investor sentiment, which showed that people overestimate the likelyhood of crashes by quite a bit. I think that same mindset, based mostly on social media headlines and discourse, creates the perfect target for this kind of high-yield product, and companies are all too happy to make money from that.
Thanks for helping the average Joe not fall for these shenanigans.
Techinically the third party can execute a call option when out of the money
🤘
Is there any evidence that companies that pay dividends are "more disciplined" in capital budgeting than ones that don't? And if that translates to higher total returns? After adjusting for size/valuation/beta/profitability etc
I'd like to share some ideas with you . Use the number
In what situations would it be optimal for an investor to buy a High Yield/low returns fund?
Seriously? In what situation would it be optimal to not invest for total return?
I’ve always thought ultra high dividend yielding funds exist because they allow investors to benefit from both low taxes on dividends and capital losses from these funds, which can offset capital gains from other investments. Essentially a tax play. Is that not so?
I do not believe that is the case. On an after-tax basis the returns will look even worse.
Absolutely they should buy the 4x spy ETN instead 🤣🤣🤣🤣 oh the limitlessness of financial innovation
Buy globally diversified low cost ETFs, and chill.
I'm a sucker for a good dividend trap and I've wasted thousand, if not hundreds of thousands on them. don't be like me.
Not related, but I'm missing the rock music intros. 😞
Me too.
Third
I understand that 10-1=9 but somehow dividend is free money
I don't understand how covered call funds can have such low overall returns though? If they are kicking out a 15% yield from the fees they get selling options, why does it matter if you miss out on the potential upside of the underlying stock? It's a covered call, so surely you aren't losing money there... so how is this 15% dividend vanishing to?
Probably because they trade their contracts too, rather than keeping them until they expire.
Capital erosion.
Covered calls are fully exposed on the downside (less the option premium) and capped on the upside.
@@BenFelixCSI so basically the fees they make from the covered calls isn't enough to cover the losses from stocks they hold that lose value (and don't have the upside of the stock appreciation either)?
That upside is fundamental to the value you are paying for the risk of owning the stock, though. You cannot glibly dismiss it as "why does it matter if you miss out on the potential upside" 😬
second
Sooo short ZWB, long SWB ? Just a convoluted way to buy calls.
first
Ok ok I'm ashamed now. lol
HMAX is for a retiree that needs the income, not growth in market price and does not want to sell in down markets to generate income, rather collect the steady income
Investors pay for dinner with their total returns, not their income yield.
ddel: what do you think happens with your high dividend stock or fund when it makes a distribution? The price drops by the amount of the dividend/distribution, on top of the price decline in the underlying stock or fund.
@@BenFelixCSI Hmmm. I am paying for more than dinner with my yield and spending more each year as dividends grow. No need to worry about selling investments at stressful times. I like it this way. Maximizing piece of mind for an awesome retirement. Game won.
@@howardfriedman7077 yes understood but I am not selling my investments
@@ddelmarsmith That "peace of mind" is really a fallacy, and over the long run it will very likely under-performed a more balanced portfolio. Sure, the more diversified/non-dividend chasing portfolio will make sales every year to generate the income, but the TOTAL return is likely to be higher.
Dividends ARE like selling a portion of the stock - but it's someone other than you doing it.
Covered calls are good for income
Your channel has become too successful and now the PLW Capital folks only service millionaires. Can you recommend advisors for the Canadian poors? I'm trying to help a friend from Canada
Sorry, I thought I had responded. PWL eliminated the minimum last year. We assess new clients based on fit, which takes lots of variables into account. Worst case, we will be able to point your friend in the right direction. They can feel free to reach out through our website.
Why are your videos so soft?
So hard to understand what the heck is he saying since it sounds so formal with all the financial lingo. He does not seem to get it.
rewatch it and lookup what he's saying, you'll get it! =)
How about doing some research before just spouting off the same old crap we have heard for 30 years , i knew you would throw TSLY in there , not everyone is looking for growth , if your 57 and sickly , do u think i can wait for Voo or SCHD to compound over 25-30 years , i need cash now , like right now
Of all the ways to get cash flow for a risk-averse investor, TSLY is an interesting choice.
If you need cash right now just sell some of your shares problem solved
If you need cash ‘now’ then why convert your cash into shares at all in the first place.
rofl at this guy telling you to do research...
Maybe that would be a good video topic? What should someone do in that position? I'm going to go scour the rest of your videos & RR vids to see if you've covered it =) @@BenFelixCSI
every single income oriented youtuber seems awe full young to me.
Ben, slow down! Why still use stilted language like "empirically"? You sound like you are writing a research paper when you talk! This is not conference presentation! This is RUclips!
Empirically means by observation or experience rather than theory or pure logic. It's a great word. I have probably used it in 99% of my videos.
@trave7644 Some of us appreciate this being both RUclips and a conference presentation, of sorts.
Woah, trave, slow down ! What's a "presentation" ?
@@BenFelixCSI I know what "empirically mean" fellow! You again missed the point! You live in some other world.
JUICE BY BEN!