Why I’m a huge fan of high yields from shares

Generally, there are three core ways for investors to invest their money. First, they pay a financial advisor or fund manager to do this. Second, they get long-term market returns by investing in low-cost index trackers. Third, they build a personal portfolio of hand-picked stocks, just like me. And I specialize in investing in stocks that offer high returns.

What is high yield?

Some listed company shares pay cash dividends to shareholders. These cash payments are usually made monthly, semi-annually, or annually. For me, these payouts are an important part of the long-term returns I get from owning UK shares.

Now my first challenge is most of the stocks listed on London Stock Exchange does not pay dividends. Usually, this is because these companies are making losses, or prefer to reinvest their earnings for future growth.

Fortunately, almost all companies are members of the elite FTSE 100 index pays dividends to shareholders. As a result, the cash yield of the blue-chip index is around 3.8% per year. Not bad, but since this is average, it can be beat.

For me, my favorite stocks offer high yields – that is, cash returns that beat the market and generate higher income than most stocks. So, I’m an old school/dividend/high-yield/income investor. Sometimes, this can be a ‘boring’ approach, but it suits me at my age (55 this month).

One big problem with dividend investing

My worst nightmare as a dividend investor is when a listed company goes into trouble. Often, they decide to cut or cancel stock dividends to conserve cash. This means that the dividend income of these struggling stocks dives or even becomes zero.

Unfortunately, when a company makes a dividend, the stock price can go down. Indeed, this has happened three times in the past six months (involving FTSE 100 property stocks and two FTSE 250 stocks). In one case, when the company cut its dividend, its stock fell by nearly a quarter that day. Urgh.

Now for my bonus kicker

Although I am a dividend investor, high yields are only part of the return on investment. Over time, the stock market tends to rise as the global economy improves. Therefore, another long-term reward comes from capital gains.

I made capital gains by selling the stock at a higher price than I paid for it. For example, if I were to buy £2,000 of shares and later sell them for £3,000, then the capital gain would be £1,000. And in my experience, the capital gains from holding stocks over decades can be tremendous.

Of course, taxpayers are waiting to take their share of dividend income and capital gains. But it is possible to reduce this burden by investing in legal tax shelters, such as pensions and ISAs.

Finally, the FTSE 100 is up 13.8% over the past 12 months. Despite this increase, I still consider this index to be undervalued, both historically and geographically. Also, I see deep value hidden in various Footsie sectors, including asset management and insurance, banking, oil and gas, mining, and telecommunications.

In short, I’d love to keep buying FTSE 100 shares for high returns, most likely until I die!