Does High Investment Yield Mean High Investment Risk?

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"When More Isn't Better: The Hidden Dangers of Chasing Yield"


Episode Overview


Does higher yield always mean better returns? In this episode, we tackle one of the most seductive—and dangerous—assumptions in income investing: that if a little yield is good, more must be better. The research tells a different story. We explore why chasing yield can become your financial undoing and provide practical frameworks to help you identify when a distribution is sustainable versus when it's a red flag signaling trouble ahead.


For DIY investors building resilient retirement portfolios, understanding the difference between attractive yield and risky yield is essential. This episode gives you the analytical tools to evaluate income investments beyond the headline number, focusing on what really matters: sustainable, reliable cash flow that won't disappear when you need it most.



Key Topics Covered


The Risk Landscape Beyond Principal Loss (02:04)


Understanding Yield Risk and Income Risk (04:15)


Critical Yield Thresholds by Asset Class (09:22)


REITs: The 5.5% Warning Line (11:55)


Closed-End Funds: Leverage, NAV, and the 8% Ceiling (14:55)


Covered Call ETFs: The 10% Reality Check (18:37)


Master Limited Partnerships: Energy Infrastructure Complexity (21:46)


Coverage Ratios: The Universal Metric (25:25)


Terminal Funds: A Special Consideration (27:01)



Critical Takeaways for DIY Investors


The allure of high yield can override careful analysis, but sustainable retirement income demands discipline. Higher yields generally indicate higher risk, and understanding where yield crosses from attractive to dangerous is essential for building a portfolio that won't fail you in retirement.


Each asset class has different risk characteristics and different sustainable yield ranges. A REIT paying 7% isn't the same as a covered call ETF paying 7%—the underlying mechanics are entirely different, and the sustainability implications vary dramatically. Context and asset class understanding matter more than the headline number.


Return of capital isn't automatically disqualifying, but it demands investigation. For MLPs, some ROC is normal and expected. For REITs and CEFs, consistent high ROC percentages signal distributions exceeding what the investment actually earns, which is unsustainable. Your brokerage platform provides distribution breakdown information—use it to understand what you're actually receiving.


Coverage ratios reveal the truth about distribution sustainability. If an investment consistently pays out more than it earns, the math inevitably catches up through distribution cuts or principal erosion. Temporary shortfalls in a single payment period might be manageable, but year-over-year patterns of distributions exceeding results should raise serious concerns.


The income investor's primary risk isn't share price volatility—it's distribution cuts. While declining share values create reinvestment challenges, as long as your income stream remains intact and covers your expenses, short-term price movements matter less. However, a distribution cut hits you twice: reduced income and typically declining share prices, creating compounding problems that can undermine your entire retirement strategy.