New approach to higher yields

Donald Saltz

May 01, 1992|By Donald Saltz

All investors know that over the past few months interest rates for standard savings, money market accounts and certificates of deposit have fallen to levels unacceptable to many. This has created a widespread search for better yields, but ones without a lot of fluctuation of principal.

The demand for alternatives has boosted bond mutual funds by billions of dollars. Their 7 percent to 7 1/2 percent yields are attractive and certainly beat the returns from passbooks, money markets and CDs. But are there better possibilities for higher yields among stocks?

Investors should approach their goal for yield in a different way than usual, which is simply to locate an investment that pays a better return and buy shares in it. Yield does not have to be entirely won in a single stroke, that is, there are quality securities with fairly good returns but which increase their payouts regularly and consistently. In choosing such an investment, the rate and frequency of increase is important.

In other words, it isn't necessary to invest only in a stock with a current high yield, but to invest in one that seems assured of going higher in the yield department.

At present, Washington Real Estate Investment Trust (Writ) of Bethesda yields about 5 1/2 percent, more than competitive with regular savings and money markets, and a match for many CD yields. But what enhances Writ is its policy of raising the dividend every year, usually by 8 cents a share.

The current dividend is $1.24 a share but by year end the rate will likely be $1.32, and in another year, $1.40. This isn't certain, but it's likely.

Therefore, someone who buys Writ at its recent price of about 22 3/4 probably will earn a return of 6.1 percent by the end of next year, with dividend yields rising as the years pass.

The Potomac Electric Power Co., which counts among its service territory more than half of Montgomery and Prince George's counties, currently yields about 6.7 percent. Pepco also raises its dividend regularly. The rate of increase varies, but recently it has been just 4 cents a share annually. If that modest rate of increase should continue, the return would rise about 0.17 percent a year. Because that rate of increase is small, the current 6.7 percent yield -- not the rate of increase -- becomes the principal yield attraction.

The shares of the USF&G Corp. have been pounded since the company's profits began to dissipate in 1989 and disappeared entirely the following year. The share price fell from the high 20s to under 6, but now it is back to nearly 11. The dividend has been chopped sharply several times, going from an annual $2.80 a share to a mere 20 cents.

USF&G has worked hard at reducing overhead and increasing competitiveness in its insurance business, and it intends to sell its less profitable businesses. USF&G has now earned a first-quarter profit, in contrast to a large loss in the same quarter last year. The profit was turned into a small loss when dividends on preferred shares were considered.

Obviously, the common stock of USF&G is not suitable for yield-minded investors, but the firm's preferred shares might be considered. Preferred shares are selling near 42 and yield almost 10 percent. The yield appears safe and the preferred share price is not likely to fluctuate much. The preferred share price could decline if interest rates, in general, increase substantially.

Investors can get better yields from stocks because, unlike the interest paid on bonds, dividends are raised. It is important to know companies' dividend histories -- they are available in references at libraries -- and to consider if the share price is vulnerable. Sharp losses on one's principal can certainly ruin a good dividend return.

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