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Explorer ○

Is reaching for yield stupid

According to Warren Buffet it is stupid to reach for yield.

  https://www.youtube.com/watch?v=4DgfBIxsPIk

Maybe he's right.

In an attempt to get some extra yield, at the beginning of 2019,  I invested 5% of my port in 2 preferred stocks (NYMTN and TGP-B)  which were recommended by a poster 'L... X..'.

Suffice it to say those 2 stocks are down 36% and 30% respectively.  

I also invested about 8% of my port in a Pimco CEF (PCI) which is down 24%, about the same as the rest of the stock market, which I can live with. 

I've got about 20% of my port in a mix of multi-sector and non-traditional bond funds (mostly PIMIX and SEMPX) which is also reaching for yield. They are all down but significantly less than the rest of the stock market, at least. 

I won't be selling any of it, at least I'll still have the yields.. I hope.

 

 

 

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Contributor ○

Re: Is reaching for yield stupid

"According to Warren Buffet it is stupid to reach for yield."

Is this the same Warren Buffet who purchased $10B of OXY preferred stock, which then  cut its common dividend by 86%?

I'd agree it is stupid to reach for yield that cannot be sustained or is at very high risk of being unsustainable. So to me, the question isn't 'reaching', its determining how sustainable the yield is going forward.

BruceM

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Participant ○○○

Re: Is reaching for yield stupid

I assume most here know this already, but risk and reward always go together.

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Re: Is reaching for yield stupid


@Bruzer wrote:

I assume most here know this already, but risk and reward always go together.


OTOH, higher yield only means higher risk of default whenever talking about individual bonds.  Is an individual stock paying, say $1/share/year riskier whenever it is trading at $10/share (10% yield) or $20/share (5% yield?)

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Explorer ○○○

Re: Is reaching for yield stupid

Speaking of default - I see both MORL and MRRL have fallen to an indicated value of $3.15. So now what?

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Re: Is reaching for yield stupid


@MNfish wrote:

Speaking of default - I see both MORL and MRRL have fallen to an indicated value of $3.15. So now what?


I dunno.  There isn't any announcement, yet, on their website as of right now.  They announced mandatory redemption of two mlp related notes, their small cap high yield note, and their homebuilders note last Friday.

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Contributor ○

Re: Is reaching for yield stupid

         sandman 100 - I personally believe it’s timing and dumb luck. We purchased many of our CEF’s for the yield only at great discounts not growth during the bank crisis. This looks like a similar situation to me. You could dollar cost average into an income investment whenever your risk parameters let’s you.

          Sure CEF’s are down more then the markets but we received all our initial invest back in about 8.5 years (72/8.5%) and really don’t care. Being leveraged we already knew it would happen again. But this took away any decisions about when to take profits from rising markets although we did that on the way up for 10 years with our growth investments. We had our reasons to do it this way. That plan is now finished.

           I still think income investing is the way to go for basic expenses. If your personal inflation rate is 2.5% all you need is a rising dividend above that from a single Aristocrat, utility, REIT etc. For the extras in retirement we used growth of the markets knowing that was a more unknown source of income. We basically ended up splitting or retirement portfolio into two parts, income (basics) and growth (retirement quality)
           

          

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Re: Is reaching for yield stupid


@BruceM wrote:

"According to Warren Buffet it is stupid to reach for yield."

Is this the same Warren Buffet who purchased $10B of OXY preferred stock, which then  cut its common dividend by 86%?

I'd agree it is stupid to reach for yield that cannot be sustained or is at very high risk of being unsustainable. So to me, the question isn't 'reaching', its determining how sustainable the yield is going forward.

BruceM


Bruce ...   I tried to do that by investing in the REITs and BDCs that gave me the most confidence they knew what they were doing and then Corona virus hits with hard blows to retail and corporate debt.  Hopefully I maintained a prudent asset allocation for my portfolio to withstand the blows.  In your case where you specifically assess and determine how sustainable the yield is going forward, it is likewise impossible to factor in Corona virus impact, the proverbial black swan event. So I believe when investors look for a little more yield for their portfolio it is wise to spread into various sectors in prudent %s (i.e., keep diversified).

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Valued Contributor

Re: Is reaching for yield stupid


@ElLobo wrote:

@Bruzer wrote:

I assume most here know this already, but risk and reward always go together.


OTOH, higher yield only means higher risk of default whenever talking about individual bonds.  Is an individual stock paying, say $1/share/year riskier whenever it is trading at $10/share (10% yield) or $20/share (5% yield?)


 

"higher yield only means higher risk of default whenever talking about individual bonds"  Huh?

Higher risk goes hand in hand with the product offering a higher yield. Today UBS announced the accelerated mandatory redemption of MRRL their leveraged ETN. The risk associated with the UBS 2X products is through the roof. Many of our members suffered from the mandatory redemption of MLPL and have avoided those type products ever since MLPL. Fool me once, shame on me, fool me twice, shame on me.

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Explorer ○

Re: Is reaching for yield stupid

Today March 17, 2020. 

My Pimco CEFs and my preferred stocks continue to go down even as the market goes up, today.

This is a painful lesson about reaching for yield. 

Can anyone relay, to this group,  what Capecod and Lord Xot are posting now? (Wherever they may be.) I don't have a Fidelity account.

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Re: Is reaching for yield stupid


@sandman100 wrote:

Today March 17, 2020. 

My Pimco CEFs and my preferred stocks continue to go down even as the market goes up, today.

This is a painful lesson about reaching for yield. 

Can anyone relay, to this group,  what Capecod and Lord Xot are posting now? (Wherever they may be.) I don't have a Fidelity account.


Have the Pimco CEFs announced any 'mandatory redemptions'?  They are leveraged products.  Have they announced any cut in distributions?  They, typically, take in more cash during the year than they pay out, until an end of the year special distribution.


The NAV and share prices have gone down.  Will they be up, or further down tomorrow, the next day, the  end of the year?  Are they 'safer' in the sense that, after reaching 4 year lows, like PCI, share prices are more likely to go up than down anymore.  After all, PCI, right now, is selling about a buck below NAV, or about a 5% discount!

The Pimco CEFs were way more risky, selling at a 'relatively' low yield whenever trading at $25/share, than now, trading at $18.50, with a 10% yield.

'Riskiness' is something to consider BEFORE the fact, not after, whenever the results of the risk taken on have come home to roost.

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Re: Is reaching for yield stupid


@ElLobo wrote:

@sandman100 wrote:

Today March 17, 2020. 

My Pimco CEFs and my preferred stocks continue to go down even as the market goes up, today.

This is a painful lesson about reaching for yield. 

Can anyone relay, to this group,  what Capecod and Lord Xot are posting now? (Wherever they may be.) I don't have a Fidelity account.


Have the Pimco CEFs announced any 'mandatory redemptions'?  They are leveraged products.  Have they announced any cut in distributions?

If anyone knows, please tell me. I hold PCI and PCN. I also hold NYMTN and TGP-B preferreds, if anyone has info on those, I would appreciate it. They've dropped like a rock. 

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Re: Is reaching for yield stupid

"If anyone knows, pleast tell me. I hold PCI and PCN.

I also hold PCI as, roughly 20% of my portfolio.  It is a CEF, not an ETN.  It is not trading in penny stock territory, like a lot of the mlp based CEFs.  It has enough BOND interest to cover it's distribution, and then some.  I consider it a safe 11% yielding bond fund, not high yield, like VWEHX, which, as an OEF, is not leveraged, or any of the high yield corporate CEFs.

FWIW.

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Re: Is reaching for yield stupid


@ElLobo wrote:

I also hold PCI as, roughly 20% of my portfolio.  It is a CEF, not an ETN.  It is not trading in penny stock territory, like a lot of the mlp based CEFs.  It has enough BOND interest to cover it's distribution, and then some.  I consider it a safe 11% yielding bond fund, not high yield, like VWEHX, which, as an OEF, is not leveraged, or any of the high yield corporate CEFs.

FWIW.


 

 A few years back I replaced VWEAX with PIMIX which has outperformed PCI and VWEAX over the last 3mo, 6mo, 1yr, 3yr, 5yr and 10yr periods.

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Re: Is reaching for yield stupid


@Bentley wrote:

@ElLobo wrote:

I also hold PCI as, roughly 20% of my portfolio.  It is a CEF, not an ETN.  It is not trading in penny stock territory, like a lot of the mlp based CEFs.  It has enough BOND interest to cover it's distribution, and then some.  I consider it a safe 11% yielding bond fund, not high yield, like VWEHX, which, as an OEF, is not leveraged, or any of the high yield corporate CEFs.

FWIW.


 

 A few years back I replaced VWEAX with PIMIX which has outperformed PCI and VWEAX over the last 3mo, 6mo, 1yr, 3yr, 5yr and 10yr periods.


Not according to this thread. The morningstart chart would lead you to believe that PIMIX beats PCI but the performance numbers tell a different story. 

 https://community.morningstar.com/t5/Closed-End-Funds/PCI-vs-PIMIX-total-return-on-Morningstar/m-p/6...

Anyway I sold off some PIMIX and JMUTX yesterday and replaced 50% of it with UTG and PKO today. Reaching for more yield, how ironic. 

I suppose my reasoning was the same as many, if I have enough dividends to meet my needs I don't have to sell my stock funds in a crash and I don't need to keep a few years expenses in cash.

In hindsight now, the latter method (keeping cash instead of risky high yielders) may have been a better way to go.

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Re: Is reaching for yield stupid


@ElLobo wrote:

"If anyone knows, pleast tell me. I hold PCI and PCN.

I also hold PCI as, roughly 20% of my portfolio.  It is a CEF, not an ETN.  It is not trading in penny stock territory, like a lot of the mlp based CEFs.  It has enough BOND interest to cover it's distribution, and then some.  I consider it a safe 11% yielding bond fund, not high yield, like VWEHX, which, as an OEF, is not leveraged, or any of the high yield corporate CEFs.

FWIW.


What will happen to it when rates eventually head north?

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Explorer ○

Re: Is reaching for yield stupid

Sometimes I wish I'd never started reading Morningstar Discussions 5 or 6 years ago. It's what got me, and probably many others, involved with Multi-Sector bond funds, CEFs and preferred stocks. My original plan for retirement was to dump everything into Wellesley. In hindsight that would have been the best move for a stress free retirement. LOL

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Re: Is reaching for yield stupid


@Bentley wrote:

@ElLobo wrote:

@Bruzer wrote:

I assume most here know this already, but risk and reward always go together.


OTOH, higher yield only means higher risk of default whenever talking about individual bonds.  Is an individual stock paying, say $1/share/year riskier whenever it is trading at $10/share (10% yield) or $20/share (5% yield?)


 

"higher yield only means higher risk of default whenever talking about individual bonds"  Huh?

Higher risk goes hand in hand with the product offering a higher yield. Today UBS announced the accelerated mandatory redemption of MRRL their leveraged ETN. The risk associated with the UBS 2X products is through the roof. Many of our members suffered from the mandatory redemption of MLPL and have avoided those type products ever since MLPL. Fool me once, shame on me, fool me twice, shame on me.


Apparently my assumption in my above post was wrong: That people here knew that risk and reward go together, lol.

Pretty simple concept, and it isn't news.

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Re: Is reaching for yield stupid

"Apparently my assumption in my above post was wrong: That people here knew that risk and reward go together, lol.

Pretty simple concept, and it isn't news."

It all depends upon what you mean by 'risk' and what you mean by 'reward'!

High yield junk bonds are 'riskier' than absolutely safe 30 day T-bills, hence pay a higher coupon.  But if the high yield corporate bond doesn't default, your 'reward' is much more interest earned over its lifetime.  If it does default, your reward is the coupon interest you received until it defaulted, but you also lost all your principle.

Another measure of 'risk' is the standard deviation of the total return of some asset, which depends, obviously, on share prices/fund NAV behavior and diveys/distributions.

My ONLY point is that a simple statement, that risk and reward go together, sometimes means proportionally, other times inversely proportional.  For high yield bonds, it's both!  8-))

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Re: Is reaching for yield stupid


@sandman100 wrote:

According to Warren Buffet it is stupid to reach for yield.

  https://www.youtube.com/watch?v=4DgfBIxsPIk

Maybe he's right.

In an attempt to get some extra yield, at the beginning of 2019,  I invested 5% of my port in 2 preferred stocks (NYMTN and TGP-B)  which were recommended by a poster 'L... X..'.

Suffice it to say those 2 stocks are down 36% and 30% respectively.  

I also invested about 8% of my port in a Pimco CEF (PCI) which is down 24%, about the same as the rest of the stock market, which I can live with. 

I've got about 20% of my port in a mix of multi-sector and non-traditional bond funds (mostly PIMIX and SEMPX) which is also reaching for yield. They are all down but significantly less than the rest of the stock market, at least. 

I won't be selling any of it, at least I'll still have the yields.. I hope.

 

 

 


Vanguard Small Cap Blend fund, VB, is down 35% from 52 week high, with a yield of 1.56%

Was it reaching for yield that brought it down?

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