The ultimate goal for people who invest in penny stocks is to discover how to find high yield stocks. After all, this market involves more risk than many other forms of investing and the goal is make profits so that your money may eventually work harder than you do. High yield stocks come in many forms and from different mechanisms. Some of the stocks grow in value so that you can sell them for capital gains. Other stocks are cash machines that pay consistent and ever growing dividends.
Keep in mind, though, that not all high yielding investments need to be stocks. Real estate and small businesses can produce great returns that are not so closely tied to the general stock market. What you look for when determining which of these investments carries the greatest potential for you varies by the method of producing returns.
High Return Stocks
High return stocks are new age thinking on stock growth. Sometimes high risk stocks, including penny stocks, are confused with high yield stocks. Just because a stock varies a lot from day to day with huge gains and losses, this won’t correlate into high returns unless you are a stock trader who is experienced in this area of high return investments. For most of us day trading will be more like a full time job than a passive income with a high time commitment, even with the use of sophisticated day trading software.
When looking for high return stocks I like to look at the compound annual growth rate (CAGR) of stocks that have been around for 20 or more years. Some of these companies have consistently grown at rates greater than 10%. Look at 3M (MMM) for an amazing logarithmic growth rate. Then I just pick these stocks up when they are out of favor knowing they’ll get back on their long term growth trend.
High Yield Dividend Stocks
Another method of finding high yield stocks is to look for stocks with high dividend yields. A dividend is a per share payment to the shareholders promised in advance. Essentially, you’re paid a wage for being a share holder with the added bonus of the wage being taxed at a very low 15% rate.
When looking for dividend stocks you want to watch their free cash flow. If the company doesn’t produce enough money to pay the dividend it will have to borrow money to pay the shareholders. This, of course, is not a financially sound principle and is an indicator that the company may be having other financial issues. Also, if the company can’t pay its dividend it may cut the dividend. When this happens the stock price will nearly always fall.
For greater security look for companies that have consistently paid dividends, even through difficult times, and companies that have raised their dividend payments. This shows dedication and it increases your chances of consistently receiving your dividend payment.
Often great dividend producing stocks will also be great high return stocks because the high dividend will attract other investors until the dividend yield is more in line with other investments.
If you prefer the predictable income to the growth potential you may try high yield preferred stocks. These stocks forgo most of the capital growth from company success, but they are promised their dividend before the common stock share holders and are usually offered a premium dividend as well.
Other High Yield Investments
High yielding stocks certainly aren’t the only place to find a good return on your money. Real Estate Investment Trusts (REITS) have done well for years producing high dividends, around 6 – 10%, plus small capital gains. Rental properties have also done well for generations. A more socially accepted form of loan sharking has opened up in the form of payday loans; this has become popular among middle class investors looking for something that will produce a good return from high risk lending.
A big tip for those who choose to venture outside the safety of the Securities and Exchange Commission is to make sure all of your deals are spelled out on paper, notarized, and reviewed by a good lawyer. The concept may be sound, but people may try to ruin your good returns.