If It Pays More, Ask Why

I took a look at Seeking Alpha’s Top 10 articles yesterday and at least 2 or 3 of them were about chasing 8%-10% dividend yields via REITs, BDCs and other products. Thus came my inspiration for writing this morning. Today’s lesson is a simple one that people don’t seem to understand: if it pays more, you should probably be asking why.

Put simply, if an investment is yielding way more than everything else, there is a reason. Many times…but not all the time…the reason increases the risk profile.

I can’t believe this needs to be said, but it does: Wall Street is not handing out free money because they think you’re special. The higher the yield, the more you should be asking, “What’s the catch?”

Whether you’re buying a REIT on Robinhood or being pitched some bullshit life insurance or annuity product by a local “wealth manager” who took you out to Chili’s to get you drunk on weakass margaritas before pitching you, asking that question is a lot of what basic due diligence in finance amounts to.

Yield is simply the income an investment pays you. Banks pay interest, bonds pay interest, stocks pay dividends, and real estate can produce rental income. Everyone loves high yields, but almost nobody stops to ask where that money is actually coming from. Some people don’t know to ask. Others don’t want to fuck up their idea of themselves as investing geniuses by learning the answers. Either way, I get it.

But think of this first. Interest rates are basically the price of money. The Federal Reserve influences short term interest rates, so it provides a good starting point. If safe short term rates are around 3.5%, you can use that as a mental benchmark for comparing...(READ THIS FULL ARTICLE 100% FREE HERE).

Contributor posts published on Zero Hedge do not necessarily represent the views and opinions of Zero Hedge, and are not selected, edited or screened by Zero Hedge editors.

Today's Top Stories