These Two Industry Stalwarts Avoid the ‘High-Yield Cliff’

“Perfectionism rarely begets perfection, or satisfaction – only disappointment.”

Those words of wisdom come from New York Times bestselling author and The Daily Stoic podcast host Ryan Holiday. They serve as a great lesson for investors, too…

We all want to own shares of rapidly growing companies with other appealing traits. We seek great balance sheets, low valuations, high dividend yields, and more.

However, we’ll rarely – if ever – find a stock that offers everything. We’re more often disappointed. That’s especially true when you’re looking at high-yielding income stocks.

But you’ll see today that we don’t need perfection. By following a simple process, we can spot attractive opportunities to earn healthy income in the months and years ahead…

In early December, I shared how you can become a “prudent yield hog” with just a few simple steps. (If you missed our two-part series, you can catch up here and here.)

In short, the trick is to find the highest yield possible while avoiding stocks that are on the edge of a “high-yield cliff.” The way it works is simple…

Just picking from the top of a list of income stocks increases your risk of stepping on a financial land mine. So my first step is to exclude stocks with yields in the top 5%.

Then, I use our “Power Gauge” system to add another layer of filtering… I exclude any stocks that our proprietary model ranks below “neutral.”

This process helps us find high-yielding stocks while avoiding ones on the brink of collapse. In fact, using this approach, I recently found two industry stalwarts with attractive yields…

I’ll start with ExxonMobil (XOM). You probably know it as a “Big Oil” powerhouse… It’s one of the bluest of the blue-chip stocks. But you might not realize that it currently yields an attractive 5.8%.

Many investors assume Big Oil is going extinct…. They’ve decided that renewable energy is chipping away at fossil fuels and will eventually supplant them.

But change is more often evolutionary, not revolutionary…

When TV became popular in the mid-20th century, for example, many people assumed it would kill movie theaters. It’s now 2022… TV has evolved into better things. And yet, the world still has plenty of movie theaters.

Renewable energy or not, ExxonMobil will continue to exist for a long time as well.

Now, I’m not suggesting ExxonMobil will survive forever. We can’t know for sure. But I do believe we’ll keep using gasoline-powered cars long enough to keep ExxonMobil’s income payments flowing to at least the current generation of dividend seekers.

Plus, ExxonMobil is adapting for the future… The company is working hard on “carbon capture” – the process of preventing carbon dioxide from entering the atmosphere. It’s also pushing its way into the new-energy era through development of low-emission biofuels.

Importantly, we know that we’ve found a safe source of yield using our filter.

Xerox (XRX) is the other high-yielding stock that caught my eye. It currently yields around 4.4%. And using my filtering process, I can see that it passes the “prudent yield hog” test.

But like ExxonMobil, investors believe it’s flawed today…

The digitization of the world isn’t good for Xerox’s high-powered office copiers and printers. And pandemic-induced work from home is another cloud over the business.

However, this is another long-term downslope… It’s not a high-yield cliff.

And Xerox isn’t giving up on growth, either. It’s building new businesses related to financial services and augmented-reality solutions for servicing digital equipment. Plus, it has an innovation hub that’s involved in 3D printing, industrial automation, and more.

Notice that neither of these companies is giving up on the future. And while their yields may be high, our “prudent yield hog” test gives us the peace of mind we need to add these stocks to an income-oriented portfolio.

We don’t need forever. We don’t need perfection. We only need good enough.

And as you’ve seen today, these two industry stalwarts offer attractive opportunities to earn healthy income moving forward. They’re exactly what we need in a yield-starved world.

Good investing,

Marc Gerstein

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