Chasing High Yields is a Recipe for Junk Equity

QVI's ongoing exposé on stock market investment practices that challenge alpha rather than generate it | The post concludes with proposed solutions

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Most private and professional investors consistently underperform the market over time. Consequently, they seek new investment strategies and stock-picking ideas since their investing behaviors fail to produce alpha.

In this series installment, Quality Value Investing (QVI) examines investor behaviors that repel alpha rather than generate it.

I apologize for my cynical perspective. Analyzing the negative aspects of a discipline like stock market investing can be just as impactful as recognizing its positive attributes, such as the ability to identify the winning stocks of enduring companies.

QVI distances itself from any short-term trading schemes aimed at quick financial gains, no matter how hopeful they may be, through controversial investment vehicles. Consequently, the newsletter discourages such schemes and leaves the speculative ventures to professional traders, market gamblers, and the Ouija board.

Throughout the post, whimsical references to the market symbolize the unpredictable nature of private investors and the aggressive behavior of professional investors, who find themselves adrift in the crowd, driven by emotions or greed when buying and selling investment securities.

Let’s explore additional investment behaviors that may jeopardize a portfolio, concluding with suggested solutions.

They Hunt High Yields Rather than Total Return

Pursuing forward high-yield dividends and non-dividend growth stories often leads to junk equity.

Many companies, whose stocks offer forward yields of 6 to 10 percent or higher, must increase their dividend rates, or their stock prices need to decline, or both, for the dividend yields to remain high or increase. Again, these situations are recipes for portfolio mass destruction.

It is uncommon for popular trends to serve as solutions for struggling investors. Yet, time and again, each investment fad proves detrimental to portfolios.

Forward high-yield dividend stocks are trendy for the wrong reasons, yet they were top of mind for investors desperate for higher payouts in the low-interest-rate environment of the post-Great Recession bull market. Consequently, many popular subscription offerings and financial media pieces concentrated on the high-yield paradigm. Unfortunately, history shows us that the crowd is nearly always mistaken concerning fads and favorites.

Market History Doesn’t Repeat but Rhymes