by Jeff Reeves | July 19, 2012 12:43 pm
Dividend investing remains all the rage, and investors continue to seek out high yield investments amid market uncertainty. So, I recently published a column about 13 ultimate dividend stocks that have big yields as well as reliable paydays.
It was well received, but I got a number of questions on the selections — and, of course, the omissions. Particularly in high-yield areas like master limited partnerships and real estate investment trusts that didn’t even make my list.
Does that mean I dislike these sectors? Not in the least. In fact, in June I made a list of 5 REITS under $10 that pay massive (but volatile) dividends. But it’s worth noting that some investors seem to have blinders on about the nature of dividend investing, and the risks of putting all your eggs in one area of the market.
For those unfamiliar, MLPs are a specific flavor of dividend stock focused mainly on the energy sector. They get the tax benefits of a limited partnership in exchange for a certain set of rules that demand quarterly distributions to shareholders. To qualify for MLP status with the IRS, a partnership must generate at least 90% of its income from “qualified” sources that most commonly include energy such as the production, processing or transportation of oil, natural gas and coal.
That means if you’re investing mainly in MLPs, you’re way too overweight in the energy sector. And that’s a risky proposition.
Same goes for REITs, or real estate investment trusts. These are another special form of publicly traded stock that get tax benefits in exchange for certain rules. Specifically, delivering 90% of taxable income back to shareholders.
REITs are mostly centered on the real estate business and related assets (obviously!) but can sometimes be quirky. For instance, Public Storage (NYSE:PSA) is a REIT even though it is more in the storage business. But it owns a large amount of land with storage facilities on them so it can qualify. Another example is the timber company Rayonier (NYSE:RYN). The company owns millions of acres of forest land.
As you can see, REITs have a little more variety than MLPs but are still firmly rooted in the idea of large land holdings. And many are pure plays on real estate – such as mREITs that trade in mortgage backed securities or a stock like Boston Properties, Inc. (NYSE:BXP) that deals exclusively in commercial real estate.
So if you only focus on REITs, there’s a very good chance you’ll be too heavily focused on housing, mortgages and commercial real estate.
My advice, then, is to look at all corners of the market when pursuing dividend stocks. If you’re chasing yield just for the sake of chasing yield you can get burned.
Yes, the best MLPs and REITs have a place in a good dividend stock portfolio. But there’s also a place for some pharma stocks like Merck (NYSE:MRK) with its 3.8% yield, some telecom stocks like AT&T (NYSE:T) with its 4.8% yield, some utility stocks like Duke Energy (NYSE:DUK) with its 4.6% yield, some consumer staples stocks like Procter & Gamble (NYSE:PG) with its 3.5% yield and even some high-yield tech stocks like Intel (NASDAQ:INTC) with its 3.2% dividend.
If you are a dividend investor you are undoubtedly looking at the long term — but making big sector bets, either by design or inadvertently by only focusing on MLPs or REITs, you can really distort your long-term performance.
Spread the dividend love around. Enjoy the big yield of MLPs like Kinder Morgan Energy Partners (NYSE:KMP), but don’t make the mistake of putting your eggs all in one basket.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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