Struggling to find high yield stocks in a low interest environment? You are not alone. Times have never been tougher for an income investor like me. Interest rates are low, bond yields barely pay you anything(bonds are a waste of time regardless), and high yield stocks are overpriced. Investors are desperate for yield so they continue to drive up REITs and my favorite dividend stocks. When I can’t find stocks to put new money into, I sell put options against companies I want to own. But volatility is too low and option premiums have dried up. It seems like the only thing you can do is sit on the sidelines and hide in a cocoon. Don’t worry, there’s still value out there and I am here to help you find it!
Finding high yield stocks can be like finding a needle in a haystack
If you read my other articles, you know that I love investing in reits. I’ve been a landlord before and managed physical property and I can honestly tell you, I would MUCH rather own REITs. That said, they make up the bulk of my investment portfolio and I’m always looking for discounts in the REIT space. There are a lot of REITs on the market in many different sectors. Personally, I have my money in the majority of them. I love the recession-proof nature of apartment reits but don’t bother putting new money into the big names in this space. Equity Residential (EQR) and AvalonBay Communities (AVB) are both yielding under 3%. It’s just not worth it and a chintzy 3% dividend is no cushion against capital loss. After all, the federal reserve could always raise rates when you least expect it.
So what do I look for? Small cap REITs! The smaller names typically have a higher yield to justify the risks associated with them. Since the smaller up and coming names don’t have a proven track record like their well capitalized counterparts, the market deems them as riskier. Their borrowing costs are also higher because in order to achieve growth, they have to take on more debt. Speaking of growth, they have a lot more runway for growth because they can take on smaller deals sizes, which means there’s more opportunities out there for them. The big players can only take on deals of a certain size in order to make any marginal impact to their balance sheet. You don’t get a high yield in this environment without the added risk so you always need to do some extra homework when buying small caps and assess your own risk-reward ratio.
There’s one name I like that fits my criteria. That name is Northview Apartment REIT. A rare find in the apartment REIT sector given that it’s yield is north of 5% as I write this. Just 4 years ago it was yielding a whopping 10%! Since then, Northview has been reducing their leverage and improving their dividend coverage. Hopefully, a dividend increase will come in the future to join the small group of high yield stocks. They are based in Canada so if you are in the US, there may be some drawbacks tax-wise. Regardless, almost a 6% yield among apartment REITs isn’t anything to sneeze at. For those that like to sell options, the stock is optionable so there’s potential to give your income even more of a boost with this name.
One of the major catalysts for Northviews growth is their high-end renovations program. Achieving organic growth by adding value form their HER program has been a major success and the potential opportunities out there using this strategy for further growth is HUGE.
Selling VIX calls
But wait.. Isn’t selling VIX calls risky? Yes, absolutely, but hear me out. I NEVER sell VIX calls without protection. Selling calls with protection so your losses are caped is known as a credit spread. Selling credit spreads on the VIX is my last resort income move when there’s absolutely nothing to put new money into on the open market. When the market finally sells off, I take a small loss and acquire a new position in companies I’ve been waiting to own. Some might be scratching their heads reading this and might disagree with using this strategy while waiting for a sell-off. Here is why I use it; we never know when a sell off is coming. While volatility remains low and the market keeps cruising along, I continue to make extra income from my VIX call spreads. If a big correction finally does come and new opportunities present themselves, I am OK with taking a small loss(and it is small because I keep my position small). Entering new positions at a deep discount far outweighs that small loss I took from the VIX. Plus, if I was waiting for a really long time, there’s a good chance I made money despite a sell off.
Covered call strategy
I also use the covered call strategy when I can’t find quality high yield stocks. I mainly use it when I have a sizable position in a certain name that I need to reduce it in order to re-balance my portfolio. Using the covered call strategy is not only a good strategy for producing income, but also serving a short-term hedge to your portfolio. Personally, I only use this strategy when I want to reduce shares. Although it helps cushion losses during a sell-off, I don’t do it for the sole purpose of hedging. The covered call strategy should only be used under special circumstances.