Building Better High Yield Portfolios – II
Balancing diversification and yield
May 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- The higher the yield, the lower the total return on average
- Combining the highest yielding strategies leads to risky portfolios
- Combining high yielding but uncorrelated strategies is more sensible
INTRODUCTION
We previously highlighted an almost linear inverse relationship between an investment strategy’s yield and its total return (read Building Better High Yield Portfolios). Investors, especially retail, continuously sacrifice the return of capital for the return on capital.
Theoretically, investors could create dividends synthetically by holding the S&P 500 and systematically sell parts of the allocation to get a desired dividend yield (read Do-It-Yourself High-Dividend Strategies), which would have resulted in a higher total return historically and also be more tax-efficient compared to high yielding strategies. However, for most investors, this is rather abstract and they prefer traditional and alternative sources of yield.
We will continue to explore how to build better high yield portfolios in this research article.
YIELD VERSUS TOTAL RETURNS
In this analysis, we include a variety of equity and fixed-income strategies and asset classes that are available as ETFs. First, we compute the CAGRs and contrast that to the median yield for the period from 2013 to 2024, which shows approximately an inverse relationship. For example, the S&P 500 had the highest return and the lowest yield, compared to mortgage REITs which exhibited the highest yield and one of the lowest total returns.
Naturally, total return is what investors should care about.
