Could high-yield investing help me build long-term wealth?

The age at which you invest can have a significant impact on which investment strategy you can use. Individual risk tolerance is also important. For example, someone in their thirties with a fixed income and limited financial obligations is in a different boat than a retiree in their sixties with lots of bills to pay. High yield investments in UK shares can generate a large stream of dividends – but they can also carry a lot of risk.

So, looking to buy stocks to try and build long-term wealth, could high yield investing be the way to do it?

Shares are not bonds

A dividend yield is an expression of the annual dividend income I hope to receive from as a percentage of the price I paid for.

So, for example, Energy Diversification can be sold at 1.07 Euro. The next dividend payment on shares of PT. That means the prospective dividend yield if I buy Diversified for my current portfolio is about 13.5%.

Mathematics and markets

Mathematically, that return sounds attractive to me. But stocks are not like bonds or savings accounts. British government bonds and savings accounts with high-street banks seem quite likely to pay out interest in line with what they are supposed to do (although there is no absolute guarantee).

Sharing is not like that. A company can decide whether to pay dividends or not. It can be cut after decades of never doing it, like shell implemented in 2020. It may cancel entirely, as the UK banks did in 2020 due to regulatory constraints. Or they may make a business choice not to pay dividends, either because profits are falling or simply to spend their spare cash in other ways.

Try Diversified. It operates more than 60,000 aging gas wells. They can be expensive to decommission. Gas prices could go down. I could put my money into Diversified stock today and not get a penny of dividends.

High return investment

So why bother buying any stock, when the dividend may not be forthcoming and the capital investment is at risk?

If I’m in my sixties, I might focus on a lower class of investments. But now, I still have a few decades to try and build my wealth before I retire.

Shares have downsides, but their value can be substantial. Maybe Diversified will continue to increase its dividend each year, as it has in recent years, and I can earn a large amount each year just for owning the stock.

Hunting quality

But if I want to target high results, I will still focus on high quality. That would be true at any point in my life.

A year ago, the house builder persimmon and insurers Direct Line has produced a double-digit percentage. Persimmon is starting to cut dividends. Direct Line canceled all payments last month.

Clearly, a double result can be a red flag. However, some companies have good business models and generate large free cash flows, but their stocks are cheap.

I think high-yield investments can help build wealth. But whatever the returns, I will also focus on buying quality businesses.