All of us want to make a good return on our money and the more we can make the better. However, chasing returns can become a detriment to your total returns.
In many countries around the world the interest (yield) being paid on government bonds is relatively non existent. In fact in some places there is actually a negative yield. Yes that is correct, you are literally paying to own that investment.
An investing environment like this makes people want to chase yield and who can blame them. Thing is when we start searching for yield we stumble across all types of investments.
When we see that some investment have eye popping big yields we want to go after those and will find a way to justify it as a solid investment. Here's where you need to be careful because you can easily get into some trouble.
I tell you this because I have done it!
Don’t Make The Same Mistake
Let me share with you an an investment I made because I got mesmerized by a high yield.
In late 2014 I started buying up shares of the Linn Energy. It is an Oil E&P setup as master limited partnership.
The price of oil had already come down 50% and the price of Linn Shares had been more than cut in half since the beginning of the year.
Well – with the price being way down and their dividend still paying the same shares of Linn now had a dividend yield of roughly 20 percent!!!
Now with the price of oil being down the profits of oil companies were obviously going to take a hit so I figured there would be a cut to the dividend being paid.
Still though – even if they cut it in half I would be getting a 10% which is still way better than most investments. Plus I was buying the stock after it already got beat up.
I checked the financials and they had hedges on 90% of their production for 2015 and roughly 65% for 2016 if my memory serves me correctly.
So I had a full year for the price of oil to recover before I’d even have to worry.
Little did I know
As we all saw – the price of oil went down even further in 2015 and languished there until giving a small rally in 2016.
My Beautiful Fat Dividend
The first shoe to drop was the dividend. I expected a cut and sure as hell we got one. What I did not expect was them to eliminate the dividend all together just a few months after.
Bye Bye To My Cash Flow
Now I was just holding a dog with no payout cause the stock continued to plummet with the price of oil and the rest of the oil e&p companies throughout 2015.
Come into 2016 – price of oil saw a nice little rally but has basically been below $50 for the most part. $50-$60 oil is a breakeven point for many of these Oil E&P names.
So after saving face in 2015 with the hedges and reduced dividend we have now seen a slew of bankruptcies form oil e&p names this year.
Linn Energy is one of them.
I finally sold out of it earlier this year and took a 95% loss on my money.
Yes – I lost 95% of my money and that’s including the few dividends I did get to collect.
It is hands down the worst trade/investment I have made in my 20 years of investing. All because I got mesmerized by an outsized yield.
Class Dismissed!
Regards,
Mitchell J
Post photos from Pixabay