Whether you are looking for capital appreciation, high yields, rental properties or any other type of asset, there are more than enough to choose from in the world of investment. One interesting strategy which has worked for many people is that of buying oversold assets which offer a high yield. The idea is that the short-term fluctuations in share prices or asset prices can lead to high yielding entry points. This not only offers a degree of backbone for your investments but also the potential for long-term capital appreciation as we will explain.
Oversold positions
Whether due to specific issues, sector issues or general market considerations, shares and assets can become oversold on a regular basis. If example you set yourself a target of acquiring assets with a yield in excess of 5%, bearing in mind the current interest rate environment, this will offer a good backbone while any short-term issues are resolved. It is different if there is a material change in the company’s ability to pay dividends or a property’s ability to attract high yielding tenants, but if all remains positive in the long-term you can not only build up a considerable income stream but also a strong backbone for your portfolio.
Market corrections
Short-term fluctuations in asset prices and share prices happen on a regular basis and if your timing is correct and your research is on the money you can make a significant return. If the long-term ability of a company to pay a high yielding dividend remains intact then eventually this will attract other investors. A rise in the share price will see the dividend yield moving in the opposite direction and creating a paper capital gain for those who bought before the move, when the asset was out of favour.
So for example, if you acquire assets where the dividend yield is in excess of 5% and set a target of selling when the dividend yield is down to 3% then by definition you will have made a capital return. If you then use this money to acquire another asset/share with an income yield of 5% and then resell once the dividend yield false to 3%, which by definition means the asset has increased in value, you can make significant long-term returns.
High yield backbone
If the recovery in the price of an asset/share is not as quick as you expected then as compensation you will have a relatively high yielding income stream. The relatively high yield will also offer support in times of market troubles. The only downside is that high yielding shares do not always move with the same speed as those bought simply for capital appreciation. However, on the upside, those bought for capital appreciation (such as technology shares) have little in the way of backbone as and when the markets turn. They are much more at the beck and call of investor sentiment.
Different strategies
While we have taken the dividend yields of 5% and 3% as examples, there may be occasions where a nominal dividend yield could rise in excess of 5% and look extremely oversold. Making use of market volatility, market opportunities and companies with a secure long-term income stream can be extremely rewarding if done correctly.