On the path from stock-market neophyte to savvy investor, you'll likely learn that "equity" investments refer to stocks and that "fixed-rate" investments mean bonds -- and perhaps preferred stocks and a few other things, too. You might also learn that a balanced portfolio should contain some of each group, weighted more heavily toward stocks the younger you are.
But in SmartMoney magazine a while back, I read an intriguing article by James B. Stewart (not to be confused with the actor James M. Stewart!), who suggested that we rethink the notion of "fixed income" and include in our fixed-income portfolios some stocks that pay significant dividends. His reasoning included the thought that traditional fixed-rate investments are not as low-risk as we think, especially if interest rates rise, causing long-term bond values to drop.
That makes good sense to me, especially for those of us with long investing horizons -- say, 10 or 20 years, at least. Stewart explained, "In my own portfolio, I've taken a sizable portion of my fixed-income allocation and used it to buy high-yielding stocks -- stocks that are yielding more than short-term CDs and money-market funds and, in many cases, more than 10-year Treasuries." Some of his listed holdings were Bank of America (NYSE:BAC), with a yield (at that time, September 2005) of 4.4%; Citigroup (NYSE:C), yielding 3.8%; SBC Communications, yielding 5.3% (and now going by the name of its recent acquisition, AT&T (NYSE:T)); and Verizon (NYSE:VZ), yielding 4.6%. If these make up most of his holdings in this department, I'd worry that he may be overexposing himself to just two industries -- banks and phone companies. But I don't know the entire contents of his portfolio, and he hasn't asked for my thoughts on it, so let's just move on.
He recommended some other high-yielders, such as Sara Lee (NYSE:SLE), ConAgra (NYSE:CAG), and Heinz (NYSE:HNZ). I'm not so sure that these are the best high-yield bets today. Sara Lee, for example, was actually recommended by Mathew Emmert in our Motley Fool Income Investor newsletter back in 2003, is up some 45% since then, and sports a tasty 4.5% dividend yield. But looking at it today ... well, it earned $0.51 per share in the last year and paid out $0.79 per share in dividends. It can't keep that kind of payout ratio going too long.
If you'd like to find some top-notch, high-yielding investments, I invite you to test-drive (for free) our Motley Fool Income Investor newsletter. Doing so will let you see a list of Mathew's "best risk-adjusted values" and the investments he thinks offer the most potential upside over the coming five years, excluding risk. On average, his recommendations are beating the market, 13% versus 9%. As of the last time I checked, more than 20 of his picks sported yields above 5%.
Bank of America, Heinz, and Sara Lee are Income Investor recommendations.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
