The age at which one invests can have a significant impact on what investment strategy it might make sense to use. Individual risk tolerance matters, too. For example, someone in their thirties with steady earnings and limited financial obligations is in a different boat to a retired sixty-something with lots of bills to pay. High-yield investing in UK shares might produce sizeable dividend streams — but it can also bring lots of risks.
So, wanting to buy shares to try and build my long-term wealth, could high-yield investing be a way to do it?
Shares are not bonds
A dividend yield is an expression of the annual dividend income I would hope to receive from it as a percentage of the price I pay for it.
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So, for example, Diversified Energy trades at around £1.07 at the moment. Its dividends in the next year are set to be around 14.5 per share. That means the prospective dividend yield if I buy Diversified for my portfolio today is around 13.5%.
Maths and the market
Mathematically, that return sounds attractive to me. But shares are not like bonds or savings accounts. UK government bonds and savings accounts with high-street banks look pretty likely to pay out interest in line with what they are supposed to do (though there can be no absolute guarantees).
Shares are nothing like that. A company can decide whether or not to pay a dividend. It can cut it after decades of never doing so, like Shell did in 2020. It might cancel it altogether, as UK banks did in 2020 due to regulatory compulsion. Or it could make a business choice not to pay dividends, because its profits fall or simply so it can spend its spare cash in other ways.
Consider Diversified. It operates over 60,000 aging gas wells. They could be costly to decommission. Gas prices might fall. I could put money into Diversified shares today and end up never getting a penny of dividends.
High-yield investing
So why bother buying any shares, if dividends might not materialise and the capital investment is at risk?
If I was in my sixties already, I might well focus on lower-risk investment classes. But as it is, I still have several decades in which to try and build wealth before retiring.
Shares have downside, but the upside can be substantial. Maybe Diversified will keep increasing its dividend annually, as it has in recent years, and I could earn substantial amounts each year just for owning its shares.
Quality hunting
But if I wanted to target high yields, I would still focus on high quality. That would be true at any point in my life.
A year or so ago, housebuilder Persimmon and insurer Direct Line had double-digit percentage yields. Persimmon has since cut its dividend. Direct Line cancelled its payout altogether last month.
Clearly, a double-digit yield can be a red flag. However, some companies have great business models and generate large free cash flows, but their shares are cheap.
I think high-yield investing could help me build wealth. But whatever the yield, I would also focus on buying into quality businesses.
