The problem with yield stocks

Tim Hannon, Chief Investment Officer at Newgate Capital, thinks ‘yield’ stocks present significant risks in the current environment. “Sometimes high-yield is an extremely risky proposition.” He is concerned about the proliferation of high-yield ETFs and managed funds, as well as direct investors, bidding up the prices of these high-yield stocks with no regard for the company’s underlying fundamentals. “We think those yields, in many cases, are unsustainable.” He presents the example of Metcash, which struggled to maintain its dividend rather than investing in the business. Once it could not continue and cut the dividend, the stocks was sold off heavily. However, this was exactly what the business needed and the stock has since rallied over 70% off its lows.