Medley Capital Corp (MCC), Enterprise Products Partners L.P. (EPD): The ‘New Normal’ For High-Yield Stocks — And What It Means For You

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We get a lot of emails here at StreetAuthority… and we read every single one of them.

We don’t have time to respond to all of them, but we try. Recently we started getting a rather persistent email from a subscriber to my High-Yield Investing newsletter.

Here’s what the subscriber wrote:

“The newsletter is called ‘High-Yield Investing!’ Stocks with 4% yields do not constitute high yield. Maybe ‘Conservative-Yield’ would be a more appropriate title. I am deeply disappointed… High Yields [start] at 9% minimum.” — H.W.

I appreciate the feedback from H.W., but the truth is, I think he may not be paying attention to what’s going in the market today.

Medley Capital Corp (NYSE:MCC)

My short answer to H.W.: It’s not 1980 or 2009. But here is my long answer…

I would love to be able to showcase high-quality, low-risk stocks and bonds with robust yields of 9% or better to my High-Yield Investing readers week in and week out. If I did, I would likely be writing to you from my own private island somewhere in a tropical paradise — because it would mean that I had access to a secret asset class that had eluded even the sharpest hedge fund managers.

Even assuming these 9% yielders had zero capital appreciation, we would still be whipping the market, which has delivered an average total return of 7.4% per year over the past decade. It’s not easy to beat the market, period, but it’s next to impossible to do so with income alone.

The fact is securities with 9% yields were commonplace after the 2008 crash. But today they are exceedingly rare.

Let’s start with bonds, which typically offer higher yields than equities. The current yield on the 10-year Treasury is 2.79%. If you’re willing to tie up your money for longer, the 30-year “long bond” will get you 3.77%.

What if I accept lower credit quality and expand the search overseas? That won’t even get me to the “conservative” threshold of 4.0% H.W. mentioned. The Bloomberg Global Investment Grade Corporate Bond Index has a current yield of 2.82%. Even the highest-paying asset class in the bond world (with a commensurate amount of risk) still falls well short of your goal.

Keep in mind that all borrowers (from homeowners to corporations to foreign sovereign governments) pay rates based on the current yield environment and their own credit standing. And the benchmark federal funds rate, which influences other rates, is at historic lows near zero.

Think back to what yields were like back in 1984, when even a 1-year bank CD paid 10.8%. If a 10-year risk-free loan to Uncle Sam paid 5%, a AAA-rated blue-chip corporate borrower might have had to pay 7% or 8% to attract capital and a shakier company might have had to offer 10%.

But inflation was also running at double digits at the time. So while the nominal payouts appeared high, the real return (net of inflation) probably wasn’t much better than it is today.

In any case, we can only take what the market gives. And right now, there are precious few bonds with 9% yields.

OK, so what about stocks? Well, the average member of the S&P 500 currently offers a dividend yield of 2.02%. What about traditionally higher-paying sectors? The SPDR S&P International Utilits Sec (ETF) (NYSEARCA:IPU) has a trailing yield of 4.22% — less than half of H.W.’s goal of a 9.0% yield. Banks won’t get you there, either.

Out of curiosity, I just ran a simple stock screen. Out of 12,592 stocks and ADRs listed on U.S. exchanges, just 170 offer yields above 9%. And most are questionable companies like African Bank Investments LTD (OTCMKTS:AFRVY), which, incidentally, has lost 58% of its value over the past year.

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