By Rida Morwa: One common criticism of high-yield investments is that they are high-yielding for a reason, making them risky. Often, there is a reason why a security has a "super" high yield. However, just because the market dislikes or fears a particular investment does not mean it is a high-risk investment. With our “Income Method”, we search for investment opportunities that pay a substantial dividend that is well covered by the business's operations, but that the market disfavors for the wrong reasons. This strategy combines immediate-income and value investing.
The Difference Between Perceived Risk and Actual Risk
Perceived risk is a subjective assessment of risk or uncertainty, based on our limited perspective. Others' perceptions will influence ours, and actual probabilities of adverse events may differ significantly. The market is often a key determiner of perceived risk. A recent sell-off, or misunderstood earnings news, or persistent negative "sector sentiment" can all be indicators of a high level of perceived risk. When such events occur, this can open the door for some great buying opportunities, especially when Mr. Market's perception is wrong about the risk factor, and when the fundamentals are strong.