Ep. 52: Informed Investing: High Yield Strategies and Dividend Growth Analysis

if an architect like handed you blueprints for a new suspension bridge and and promised it would
hold, and I don't know, 10 times the normal traffic, but then mention offhand that they were only
going to use half the usual amount of steel. You wouldn't be celebrating the efficiency ride. You'd
be terrified. Oh, absolutely. Yeah, you'd assume they were either bending the laws of physics or
just hiding some fatal structural flaw that's going to cause the whole thing to end up in the river.
Right. You would run the other way, but but in the financial world, when an investment promises a jaw
dropping, like 80% yield, people don't run away. They run toward it. They flock to it. It's why.
So welcome to our deep dive for today. We have a massive stack of May 2026 financial sources in
front of us. We're talking sub stack newsletters, macro market reports, deep dive YouTube portfolios,
you name it. It is quite the stack today. Yeah. And our mission today is to really crack the code
of dividend investing and income ETFs for you. We're going to separate the real compounding wealth
generation from those dangerous yield traps that look amazing on paper, but essentially just destroy
your capital and practice. Yeah, because looking at this stack, the extremes are just wild right now.
Exactly. I mean, we've got incredibly safe 2% yields on one end and then literally an ETF yielding
nearly 80% on the other. So let's unpack this because obviously not all income is created equal.
We really need a framework to look at these numbers without, you know, our expectations getting
completely distorted by the sheer size of the payouts. Yeah, I think the best way to frame this is to
stop looking at the size of the yield and start looking at the actual mechanics of where that cash
is coming from. Yeah, because it has to come from somewhere. Right. It doesn't just appear out of thin air.
Exactly. And one of our sources, it's an article called the 7% illusion. They break this down into
three distinct categories. If you don't know which category you're buying into, you're honestly just
flying blind. Okay, so what's category one? So category one is what they call good yield. This usually
sits in the 2% to 4% range. Think of classic dividend stalwarts. So for example, MO, which is the
consumer defensive giant Altria or broad dividend ETFs like SHD or VYM that focus on, you know,
fast growing US companies. And the mechanics there are pretty straightforward, right? Very straightforward.
The company's manufacturer product, they make an actual profit, and they hand a slice of that
physical profit right to you. Which is, I mean, that's the traditional model of investing. It's slow,
it's steady, and the payout is tied to the actual success of the underlying business. Right. But then
you get into category two, which is where the engineering begins. Ah, the engineered yields. Yeah,
this is the 7% to 10% range. So you're looking at ETFs like JAPI or QQQI. And these funds they generate
income through options strategies, primarily selling covered calls. Okay, let's actually pause and
explain that mechanism for anyone who maybe hasn't treated options, because selling a covered call is
essentially like, it's like selling a developer a ticket that gives them the right to buy your house
next month at today's price. That's a really good analogy actually. Yeah. So property values flatline
or drop, the developer doesn't use the ticket, right? Yeah. And you get to keep the cash that paid you
for it. But if property values absolutely skyrocket, you still have to sell your house at that
old lower price. You are basically trading away your future upside for immediate cash today.
That is a perfect way to visualize it. You get higher monthly cash flow. But if the broader market
goes on a massive bull run, your gains are structurally capped. You've essentially sold away the growth.
Right. And then then we reach category three, which the author calls return of capital yield. This is
the 9% to 12% above range. You find this in funds like QILD or XYLD. And these are the really dangerous
ones, right? Yeah, because these funds run systematic covered calls on almost their entire portfolios
continuously. Because they capped their upside so heavily, they miss out on basically all the market
rallies. But, and this is the kicker, they still take the full brunt of the market crashes.
Ouch. Yeah. So their net asset value or the NEV, it just constantly erodes over time.
All right. So category three is basically a financial snake eating its own tail. You're getting a
12% yield. But part of that is literally just your own initial investment being handed back to you
while the funds net asset value just drops. Trying to hold that it feels less like investing and more
like stepping onto a treadmill that is slowly speeding up and reverse. Yeah, you have to run at a dead
sprint just to stay in the same place. Exactly. So why does anyone fall for this? Why is there such a
massive market for these funds? Honestly, it all comes down to behavioral psychology. I mean,
monthly cash deposits into your brokerage account, they feel tangible. You see that cash hit,
your brain gets a literal dopamine spike and you feel like you're winning. Right, it feels like a
paycheck. Exactly. But gradual NEV erosion, like a stock price, slowly bleeding out from $50
down to 40 over five years. That's abstract. It's just a number on a screen that's very easy to
ignore until it's way too late. And the off of the subset points out that finding a 7% yield
that also consistently grows its capital base is incredibly rare. So to counteract this psychological
trap, they recommend a balanced approach. What does that look like? They suggest allocating 30% to
closed end funds like UTF, 20% to engineered funds like QQQI and then mixing in some traditional dividend
payers like MO and even short-term treasuries like SGOV. Okay, but wait, if a 12% yield causes capital
erosion, the 40% to 100% yields mentioned in another one of our sources, those must be absolute portfolio
destroyers, right? Unless there's a very specific tactical way to trade them. Oh, they are
destroyed if you don't know what you're doing. Right, because we have a YouTube investor in our
sources who's managing a $1.6 million portfolio and he's generating roughly $117,000 a year just
focusing on his 10 favorite ultra high yield ETFs. Yeah, the numbers on that one are just crazy.
The distribution rates are mind-blowing. He's got NVDG yielding around 79%, NVDY at 46%,
there's the Rex Wal-Mart ETF at 43%, and YSPY over 40%. I mean, trying to hold these feels like
trying to catch a falling knife given the price decay. And he would be catching a falling knife if he
bought them like a normal investor. But the only reason this works, the only reason is that the
strategy relies on aggressive, tactical market timing. Okay, so he's not just buying and holding.
No, not at all. He buys small amounts consistently, but then aggressively loads up on deep red days.
You know, when the market is panicking and prices are crashing, he's deploying massive chunks of capital.
Yeah, okay. So he's using those massive 80% dividend payouts to offset the price decay.
And by buying at the absolute bottom of a dip, he lowers his average cost per share enough to
actually survive the volatility. Exactly. That offset strategies the only mathematical way this works.
If you hold these for, say, one to three years using that specific tactical approach,
the distributions can potentially pay back your entire initial investment and cash.
Yeah, he mentions a few others. He trades this way, LGY, BLA, AIPI. But his absolute favorite right now
is CHI PY. It yields around 40% with exposure to semiconductors. And as of his filming,
it actually hasn't shown any price decay yet. That's insane. But playing that game requires watching
the market like a hawk. And frankly, even if you do, I want to contrast these tactical plays with ETFs
that our sources say are just fundamentally dangerous. Yeah, there are definitely some toxic traps out there.
Right. Our source material from 24-7 Wallsain explicitly calls out ETFs that investors need to dump
immediately like KBWD. It boasts as a 13.23% yield. But underneath the hood, it is hiding an absurd 5.39%
expense ratio. It's just robbery. It gets worse. It's heavily exposed to private credit and AI
startup lenders. You are paying a premium to hold incredibly risky debt that could default the
second the economy titans. And they also mention QILD as a poor choice compared to, say, JPI, which
gives you an 8.3% yield with only a 0.35% expense ratio. Yeah. And they also brings up a third
dangerous ETF, which is DIV yielding 6.66% and this one is interesting because the source notes that
DIV holds a lot of real estate and energy. Those are sectors that typically thrive when interest rates are
cut. But the author argues that those rate cuts are now highly unlikely pointing to oil prices driving
up inflation. And there was a very specific political situation tied to that claim in the article,
yes, there was. Now, to be completely clear to our listeners, we are just reporting what's in
the article here. We are absolutely not taking a political side or endorsing this claim. Right,
just analyzing the investment map. Exactly. But the source material claims that Fed Chair Jerome
Powell has no intention of stepping down in mid May because he is supposedly waiting out of DOJ
investigation. And regardless of the politics, the underlying market takeaway from the author is
simply that rate cuts are entirely off the table. And without those rate cuts, DIV's heavily
indebted real estate companies are really going to struggle. Okay, so playing the high yield game
requires constant vigilance, timing the market on red days, and apparently dodging macro political
events. If you just want to sleep at night, what is the absolute opposite of this strategy?
The antidote to all of this, the stress free wealth builder, is shifting your focus away from high
starting yields and looking at low starting fast growing dividends. Okay, explain that. It's all
about the power of yield on cost. We have a report here from Hartford funds and Ned Davis research
and the data is pretty clear. Since 1973, dividend growers returned 10.24% annualized. Companies that
didn't grow their dividends, the only returned 6.75%. Okay, here's where it gets really interesting.
Let's look at Costco. Right now, it's dividend yield is tiny. It's roughly 0.5%. To a yield
chaser, Costco is basically invisible, but they just hiked that dividend by 13%. Yeah, they did.
That's their 21st consecutive year of increases. They're averaging 12.5% growth a year over the last
decade. And because their payout ratio is only 28% of their earnings and they're trading it like 52
ex earnings, they have the actual cash flow to sustain it. And that's where the yield on cost math
kicks in. Exactly. If a listener bought Costco 10 years ago, you aren't making a 0.5% yield on your
investment today. Because the dividend payout grew so much, you are now earning over three times
your original yield in pure cash plus the stock has exploded in value. It's incredible compounding.
And the source highlights others doing this too. Parker Hanuffin just announced an 11% hike,
which marked 70 straight years of increases. Wow, 70 years. Yeah, and cover systems USA announced a 14.3%
hike. Their payout ratio is a tiny 8% and they are sitting on itself 0.45 billion dollar backlog
of contracted work. So they have guaranteed revenue locked in. But obviously the trick is finding
these companies before they take off. Right. And that connects perfectly to Morningstar's 2026 class
of dividend growers. Their math is staggering. To make the list, a company must have increased
its dividend by at least 10% every single year for the last five years. That's a high bar. It is.
Because a 10% annual increase compounded over five years equals a 61% total payout growth.
Okay, but looking at the criteria for this Morningstar list, they need 10% growth for five years,
an economic moat, low to medium uncertainty, and over a 1% yield. Wait, TJX is on here as a newcomer.
Didn't they cut their dividend by like 74% during COVID? They absolutely slashed it during COVID,
yeah, which why they fell off these lists. But Morningstar included them this year because of how
management rebuilt it. Since that cut, TJX has strung together five clean years of 10% plus growth.
They hit the math. Oh, wow. Okay. So who else made the cut? We have returning names like Accenture,
Snap-On, Nextera, SBA, Domino's, Sodus, MSCI. Newcomers include Intuit and Motorola, mostly because
recent stock pullbacks pushed their yields above that 1% threshold. Did anyone get dropped? Yeah,
Broadcom actually missed out because massive price appreciation pushed their yield below 1%. And they
dropped Mandlery, Elevans, Steeple, SSNC, and United Health. The United Health got booted because
their uncertainty rating was upgraded to high. And for anyone looking for discounts, the report mentions
Zowedis is sitting at a 32% discount right now. Accenture is at 30%. Domino's is at 23%
Intuit at 19%, and SBA at 13%. But it makes me wonder, traditional dividend growers like
utilities and pharma, they often cap out, right? They can't sustain 61% pay out growth in definite.
Oh, they really can't. So if we need sustainable double-digit growth,
do we have to look outside traditional dividend sectors like what about tech? You definitely have
to look at tech, specifically information technology. But valuing tech stocks for dividends requires
an alternative framework. One of our sub-stacks sources uses something called dividend yield theory.
Okay, how does work? It's basically comparing a stock's current dividend yield to its historical
average, assuming the business is still sound. If the current yield is higher than its average,
the stock might be undervalued. Oh, I see. So it's basically using the dividend pay out as a
thermometer for the stock's valuation. If the yield spikes, it means the stock price dropped, so the
stock is on sale. You've got it. That's exactly it. And the source walks through five IT stocks using
this exact thermometer. Let's look at Mastercard. It has a tiny 0.69% yield, but a roughly 15%
compound annual growth rate across three, five, and 10 years. The theory points to a roughly 20%
forward return potential. That's huge for a blue chip. Yeah, then you have ADP. Their current yield
is 3.16% versus a 2.15% five-year average. Wait, why is ADP's yield spiking so much? They're being
pressured by broad-sauce challenges. The stock dropped from a high of 3.30 down to around 2.15%.
So it's presenting a greater than 30% discount right now. Makes sense. Any others?
Paytex is showing a greater than 4.5% yield versus its 3% average, pointing to a 37% potential
undervaluation. Microsoft is interesting is 0.86% yield is basically right at its 0.83% average,
but because of its massive 10% annual hikes, it still has a nearly 20% forward return estimate.
And finally, Badger Meter, which does water management and smart metering, has a 1.36% yield versus a
0.77% average, showing a greater than 40% discount. Okay, but whether you are stock picking tech,
buying dividend growers, or playing high yield options, it all really depends on what the broader
market is doing right now in May 2026. Well, 100% macro market momentum dictates everything.
Right. And looking at the IV portfolio, April 2026 data from our sources, they track five ETFs,
VTI, V-E-U, I-E-F, VNQ, and DBC. And they use 10 month and 12 month simple moving averages
to signal whether you should invest or move to cash. In April, the S&P 500 had a massive 10.4% gain.
It was its best month since November 2020. It was a monster month.
Yeah. And now, all signals across all time frames, including the 10 month EMA, they all converge on
an invest position valid through May 31st, 2026. Every indicator is flashing green to stay fully
invested in the market. So what does this all mean? If we want to stay invested to capture that growth,
but we still want the high income we talked about in section 1, how do we get the best of both worlds?
Well, our final source has the answer. They pitch it as the ultimate hybrid ETF, the one you can hold forever.
It's GPIX, the Goldman Sachs S&P 500 core premium income ETF.
Why does GPIX solve the dilemma better than the other ones?
Because it pays an 8 to 8.5% yield. But unlike those dangerous, fully-capped covered call ETFs,
we talked about earlier, GPIX dynamically sells call options.
Wait, dynamically, what does that mean for the upside?
It means the underlying S&P 500 exposure is not completely capped.
If the S&P 500 goes up over the next 5 to 20 years, you actually get to participate in that growth.
Oh, wow. And what if the market just trades sideways?
If it trades sideways or slightly down, the option premiums act as a buffer,
allowing you to actually outperform the index while still collecting your yield.
So it's basically an income fund that doesn't force you to sacrifice the entire bull market.
Exactly. That is incredible. So summarizing this whole journey for you today,
we started by learning how to avoid the 7% illusion and those toxic expense ratios.
We looked at how some people survive ultra high yields by tactically buying on red days,
and then we pivoted to the real wealth builders leveraging the compounding magic of yield on cost
and using dividend yield theory to buy tech on sale.
It's a lot to process, but it really shifts how you look at the market.
And I want to leave you with a final thought to mull over.
We've seen today how heavily engineered ETFs are basically transforming capital
into monthly cash flow. It raises a really important question.
As an entire generation of investors becomes addicted to the psychological hit of monthly income
deposits, will traditional buy and hold growth investing just become a lost art?
And if it does, what happens to the market when everyone wants a yield, but nobody wants to wait
for the growth? That is a fascinating question to end on. If nobody is holding for growth, the whole
dynamic of the market changes. Apply these frameworks to your own portfolio and keep questioning where your
yield really comes from. Thanks for joining us on this deep dive.