Investing in the stock market: how to choose the right yield stocks


Yield values ​​provide a source of income Photo credit: CREDIT_NON_AFFICHE

In times of low interest rates, yield stocks represent an opportunity to diversify sources of income. One of the strengths of these securities lies in the durability of the dividends paid. This is why we must be attentive to the distribution rate of the companies.

Summary:

  • Dividends, a source of income in times of low interest rates
  • Traditional sectors variously exposed to the crisis
  • Dividends lowered in 2020
  • Remain selective in the choice of its performance stocks
  • Focus on healthy balance sheets and profit prospects

Dividends, a source of income in times of low interest rates

The search for added value is not the only criterion for choosing a security. The return to value is also interesting to consider. Yield stocks even tend to outperform over the long term, according to a Hartford Funds study. They therefore represent an important part of the performance of the CAC 40 over time.

The yield is defined as the ratio between the dividend and the market price of a share. Securities that distribute dividends above the market average can thus offer attractive opportunities in times of low interest rates. They are in fact an alternative to bond investments that have become less profitable due to the monetary interventions required to support the economy and businesses in the face of the health crisis. 70% of corporate debt (bonds corporate) of the Investment category thus traded with yields of less than 0.2% in Europe and half of them at negative rates at the end of March 2020!

Traditional sectors variously exposed to the crisis

Companies that pay regular dividends often belong to traditional industries. For example real estate, consumer products, transport, energy, utilities (water and energy distribution), finance and banking, or telecoms, which are variously affected by the crisis. Relatively spared by the economic climate, healthcare and utilities companies were able to maintain their dividends in 2020. But the high yield of a security can also be a sign of the markets’ anxiety, which is marked by the drop in his courses.

Dividends lowered in 2020

In the sectors most penalized by the health crisis, adaptation to this new context has prompted certain companies to revise downwards the payments planned for the profits for the year 2019. First concerned, the aeronautical companies, automotive, tourism and hotel industry. Priority has thus been given to preserving cash flow in 2020. Strengthening equity capital will remain another priority for some of them in 2021, in particular those appearing among small and medium-sized stocks on the stock market.

Remain selective in the choice of its performance stocks

Selectivity with regard to the sector is therefore essential when choosing its performance values. In particular in the face of the new economic situation generated by the global health crisis, which continues to reshuffle the cards in many areas. It is therefore prudent to play with diversification in terms not only of stocks, but also of sectors to reduce the risk of your stock market portfolio.

Another important selection criterion is the regularity of the dividend payment. Indeed, the payment of a dividend in a given year is not necessarily a sign of profitability for the company. The dividend can effectively be taken from the company’s reserves. To get an idea of ​​the sustainability of the dividend payment, it is necessary to be attentive to the “distribution rate” of the company. This ratio measures the share of annual profits that goes to the shareholder in the form of dividends. If it is high, the future dividend may be called into question in the event of a drop in results.

Focus on healthy balance sheets and profit prospects

The quality of the company, its strategy, its management and its balance sheet are other key criteria to be taken into account in general when choosing an action. It is possible to rely on the expertise of a professional to choose securities, in particular by opting for equity funds specializing in yield securities. Collective management also allows you to diversify your stock market portfolio.

Diversify your sources of income with value funds

To invest in yield stocks, it is possible to turn to value style funds. Rating agencies like Morningstar list categories of value equity funds by geographic area, which allows them to be identified. Some Sicav and FCP managers specialize in identifying undervalued nuggets which, according to their analysis, have a potential for a rebound. This style favors discounted stocks that regularly generate dividends, offering comfortable sources of income. To collect the income from its investment, two solutions are possible. Opt for distribution shares or capitalization shares of these funds depending on whether you wish to receive or reinvest the dividends received each year, quarter or semester as the case may be.

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