When I was younger, I spent my investment time looking for stocks with 10% yields. Sometimes those investments worked out very well and sometimes they resulted in me owning stocks that went belly up. My worst offense, however, was thinking that a rising tide lifts all boats. That's just not true when it comes to high-risk stocks and a Wall Street uptrend. High-risk investments are high risk no matter what's going on with stock prices more broadly.
A big win and a lucky break
I've owned Realty Income (O -0.17%) twice. The first time I bought it was decades ago at a time when it was sporting a dividend yield of roughly 10%. It was a well-run company then and still is, noting that the yield is less than half that level today and there have been annual dividend increases each year since I bought it that first time.
I actually sold it when the yield dipped down into the 4% range, a decision that I subsequently regretted. One of the reasons for that 10% yield was that real estate investment trusts (REITs) were still a small and misunderstood asset class. That situation has changed over time and resulted in the yield range shifting to a lower level.
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I own Realty Income again thanks to the REIT's purchase of VEREIT. The key to that story is that Realty Income has always been conservatively operated. And while my VEREIT purchase worked out well in the end, being that I happily own Realty Income again, when I bought the stock it was a very risky company and I knew it.
To summarize a lot of time into a very short space, an accounting error highlighted the weaknesses of VEREIT's overly aggressive acquisition approach, leading to a management shakeup and complete business overhaul. It wasn't until years after a dividend elimination (and subsequent resumption) and a steep stock price decline that VEREIT had fully "cleaned house" and it was acquired by Realty Income.
The sad part about my VEREIT purchase (it was known as American Realty Capital Properties when I added it to my portfolio) was that, as noted, I walked in the door knowing exactly what management was doing. I just figured that it had achieved such success with its roll-up approach that I was overestimating the risk, particularly since the market at the time was still fairly strong. I was wrong and suffered for it, only saved from my own mistake by Realty Income ... and the proceeds from shareholder lawsuits.
High risk is high risk
The big takeaway for me, and I hope for you, is that buying overly aggressive companies that expose investors to material risks is probably a bad idea no matter what the market environment. To be fair, there are some investors who focus on turnarounds and special situations, which is fine, and owning riskier investments is inherent in these approaches.
I try to focus on creating a reliable dividend stream, so pushing too far out on the risk front is a bad plan for me. That's not to say that I don't make mistakes, but I try to avoid the same mistake I made with VEREIT/American Realty Capital Properties. A big dividend yield is great, but not if it can't be sustained.
A more recent example of this would be B&G Foods (BGS 1.19%). This is not a stock I own, but it takes a contrarian approach in the food space. Consumer staples makers, like food stocks, have been benefiting from the ability to raise prices. Only B&G Foods' approach is aggressive, in that it uses leverage to buy unloved and smaller brands that it then showers with love. It's actually pretty good at making this work, but rising interest rates caused a material business headwind thanks to rising interest costs that ultimately resulted in a dividend cut. Before the cut, the yield was over 10%.
B&G Foods is a better-run company than VEREIT/American Realty Capital Properties was before its crackup. And contrarian types might very well find B&G Foods highly attractive, especially since the dividend cut risk has, via a dividend cut, likely been addressed. But for a conservative investor looking to live off of dividend checks, it is still a bad choice because the business model is inherently high risk. To be honest, I find B&G Foods' approach enticing, but the leverage issue has kept me away. A lucky thing for my dividend portfolio!
Focus on the business, not the market
In the end, Wall Street is a complicated place. There are always trends going one way or the other and it's easy to get caught up emotionally. As an investor, however, you need to step back and think about what stocks you are buying as they exist individually. A giant market rally won't change a risky stock into a low-risk one, and you might find that your investment is making 52-week lows even as the broader market is hitting all-time highs.
