The S&P 500 has already increased in value by over $1 trillion in 2018—and January isn’t even over yet!

What’s behind this incredible bull market isn’t euphoria or hysteria—it’s actually sound investing principles. As I wrote in a January 18 article, the bull market is being driven by the best possible trend: higher earnings and sales for America’s best companies, which is itself the result of improving economic conditions for everyday Americans.

Parties ultimately end, of course. And this one is no different—the bull market is being driven by a solid and reasonable belief that American companies will go up in value. But eventually that sound line of thinking will turn into a euphoria that creates a bubble—then a crash.

Fortunately, we aren’t there yet, and we probably won’t be for a couple years or so. Unfortunately, though, we are seeing some foolish investing decisions being made as a result of naive first-level thinking.

Today I’m going to show you 2 common mistakes—and 2 investments—that have captured the herd’s attention for all the wrong reasons. Read on to learn more about them, and how you can steer clear.

Mistake #1: Buying on Dividend Yield Alone

The Eagle Point Credit Company (ECC) pays an outsized 13% dividend yield as I write this and makes a simple claim: that its financial professionals know how to make money from obscure and complicated investments.

But that’s not the whole story.

It’s true that ECC is one of the biggest investors in collateralized loan obligations (CLOs), and it’s true that CLOs are very complicated. You can think of CLOs as derivatives that are a lot like the mortgage-backed securities that were at the heart of the financial crisis; ECC claims to understand these assets and can make a profit accordingly.

The real problem, though, is ECC’s sky-high fees.

Last quarter, ECC reported a 10.7% expense ratio. In other words, for every $1.00 in assets the company has, it takes out 10.7 cents per year in fees. ECC needs to make a 10.7% profit on its investments just to pay its managers—before shareholders get a penny!

Of course, before many folks even get to the fees, they see the juicy dividend yield I mentioned earlier, which has ranged to nearly 15% so far this year, and hit the buy button.

Juicy Income—At First Glance

Trouble is, that sky-high yield is because the stock’s price keeps falling.

ECC Not a Grower

Notice the huge drop in price over the last week? That’s because ECC issued new shares, diluting current investors’ ownership. Why would ECC do such a thing? They may want to release more shares to make more aggressive bets in the CLO market. It’s also true that more shares translates into more assets to manage, generating more fees for ECC.

This is definitely an investment to avoid.

Mistake #2: Ignoring History

It’s true that history doesn’t repeat itself, but it does rhyme, and in financial markets, rhymes on historical events are sometimes all the signal you need to stay away.

This is the case with Prospect Capital Corporation (PSEC).

I haven’t talked about this stock in over a year, because it was pretty clear that Prospect’s past mistakes were recurring, and that meant we would see the same chain of events as in yesteryear.

And that’s what 2017 delivered.

Let’s back up. PSEC is a business development company (BDC) that’s structured to give most of its income to shareholders. That’s why PSEC yields over 10% right now.

There are just a couple problems.

For one, the BDC world is getting extremely crowded. BDCs are a good idea—they pool together a lot of money from investors and then lend that money out to small and medium-sized businesses that can’t get loans easily from banks.

But BDCs are such a good idea that a lot of new ones have opened up in the last few years. It’s an easy way to make money if you have connections and access to capital, so the barrier to entry is low. That crowdedness has also resulted in profit margins shrinking for BDCs, in turn lowering the income most BDC shareholders have access to.

Meantime, the extremely illiquid portfolios that BDCs hold are nearly impossible to sell in a market panic, which further boosts their risk.

Those two reasons alone are good motivation to stay away. But many investors ignored them in the first couple months of 2017, which is why PSEC did this:

A Crowded Trade

If you were playing PSEC for the short term, this was great. Most PSEC holders aren’t, though—they buy for that 10%+ dividend and hold forever. Which is why PSEC shareholders aren’t happy now, as you can see from this chart:

A Steep Drop

Not only has PSEC’s price crashed since its big early 2017 run-up, but its dividend has been slashed by 28%, as well. Note that the majority of the price crash happened before the dividend cut. The market isn’t clairvoyant—but a lot of investors who looked closely at PSEC saw that its dividend coverage ratio had fallen below 100%, and it could no longer afford to pay its high payout to shareholders.

This wasn’t a shock; Prospect had the same problem in 2015. And it will have this problem again and again and again … causing the stock to keep crashing and the income stream to keep shrinking.

2 Takeaways to Protect and Grow Your Nest Egg

What can we learn from these 2 examples?

First, be suspicious of high dividends. While 7% or 8% yields can be sustainable in many cases, it’s very rare (but not impossible, as I’ll show you in a moment) for a 10% yield to be sustainable. The higher the yield, the more need for a careful analysis of how sustainable that dividend really is.

Second, we need to pay attention to history. Investors who took the time to look just a couple years back into Prospect Capital’s past knew to stay away.

The third, and perhaps most important, lesson relates to complexity. Some financial advisors urge clients to avoid investing in anything they don’t understand. This is silly. None of us really understand what goes into our iPhones, but that hasn’t stopped Apple (AAPL) from soaring.

Companies that produce financial products are no different. They provide a value and a service, and investors can profit from them even if they don’t understand the technicalities.

However, we must be able to identify and quantify the value a company provides, and how that value is changing. The real problem with ECC isn’t that its business is too complicated—it’s that ECC’s management earns too much money by charging shareholders for their services.

The bottom line? Find companies and funds that have management teams whose interests align with yours, a history of making the right decisions and a structure that rewards shareholders more than managers. When you do, you’ll find that massive profits come your way.

Michael Foster has just uncovered 4 funds that tick off ALL his boxes for the perfect investment: a 7.4% average payout, steady dividend growth and 20%+ price upside. — but that won’t last long! Grab a piece of the action now, before the market comes to its senses. CLICK HERE and he’ll tell you all about his top 4 high-yield picks.

Source: Contrarian Outlook 

Investors in high yield InfraCap MLP ETF (NYSE: AMZA) were shocked to get the news of a 36% dividend reduction. Fortunately, there is no reason to panic, and there are some good lessons to be learned from the past and future history of AMZA.

AMZA is an actively managed exchange traded fund that owns a portfolio of publicly traded master limited partnerships (MLPs). The MLP sector is known for high current yields. The AMZA management boosted the fund’s income with call options selling. A $0.52 per share quarterly dividend had been paid since the start of 2016. With the fund’s shares trading between $7.00 and $11.50 over the last two years, the result was a yield in the high teens to mid 20% range.

On Friday, January 19, the fund management company announced the dividend would be switched to a monthly payment of $0.11 per share. This lowers the annual dividend amount to $1.32 from the previous $2.04. This was a prudent move by management to keep the dividend stable as the fund continues to go through significant growth pains. Instead of going deeper into the reasons for the dividend change, I want to cover some lessons learned.

Lesson 1: An ETF is not a stock. I received a lot of questions asking if the AMZA share price would drop due to the dividend cut. That typically happens with a company cuts its dividend. However, as an ETF, the AMZA share price is not determined by investor sentiment. The share price is a mathematical calculation of the value of the portfolio divided by the number of shares held by investors. AMZA moves up and down generally along with the overall MLP sector. It does not matter to the share price whether the dividend has been cut.

Related: The Safe Monthly Dividend Stock to Buy and Hold Forever

Lesson 2: Compound reinvestment of a high yield security is a very powerful wealth building strategy. If you look at theis price chart showing the Alerian MLP Index and AMZA over the last two years, it looks like it would be impossible to have gains in the MLP sector over the full period. MLPs went through a steep correction to start 2016 and then a bear market that lasted most of 2017.

Yet, if you took those big dividends from AMZA and bought more shares, you would now be well ahead. Here is the math. One thousand shares purchased at the start of 2016 cost $11,200. If the dividends were reinvested at a price near the ex-dividend date price each quarter, the quarterly dividend payments would have grown from $520 paid in January 2016 to $777.92 earned in January 2018. Total dividend earnings were $5,763. Reinvesting those dividends resulted in a current total share count of 1,587. At the current share price of $8.88, those shares are worth $14,093. Through an ugly stretch for MLPs, the investment grew by 26%. At the new, lower dividend rate, the current number of shares will generate about $175 in monthly income, an 18% yield on the original investment amount.

The next step is to get a sustained uptrend from MLPs, and it looks like one started in November 2017.

Lesson 3: If you are an income investor, don’t focus on the share values in your brokerage account. Keep track of your dividend income, reinvest some or all that income and over time your income stream and account value will grow. It’s powerful math that is not obvious when you look at share prices and price charts.

AMZA has entered a new phase in its life, and I am excited to see where it goes from here. The yield is still a high 15% and the MLP sector fundamentals are the strongest they have been since 2014.

At least several times a week, I get a note from a newsletter subscriber or other investor who has heard a stock market correction or bear market is coming soon. The next statement is that the investor either plans to sell his stocks until prices drop or wait for the prices to drop before buying into any stocks. Like many commonly held beliefs about investing in stocks, this is one that is likely to cost the investor a lot of money.

Here are a couple of reasons why selling to avoid a market correction or waiting for one to buy will cost an investor money.

Reason 1: No matter what you see or read in the financial news, the next bear market does not appear to be imminent. The main reason to forecast an approaching bear market is because it has been almost nine years since the end of the last one. This logic doesn’t work because bear markets do not follow a calendar. Ten of the last 12 bears have been associated with an economic recession. The current economy gives zero indication that the next recession is on the horizon. History tells us that the economy will at some point go to negative growth, but currently there are none of the usual indicators for a pending economic downturn.

A stock market bear market is arbitrarily defined as a 20% decline from the most recent high. While the last decline of this magnitude occurred in 2008-2009, there have been several “near bear” corrections since then. Here are the three significant corrections that occurred during the current bull market:

• 2010: 16% decline
• 2011-2012: 19.4% decline
• 2015-2016: 14.3% decline

These corrections have acted as circuit breakers that keep the current market values from a place where a big drop is likely just to take off some of the froth. While it is likely that a correction will occur within the next year (they happen on average once a year), a true bear market is very unlikely.

Reason 2: History shows that getting out of the market too early costs you more than riding out corrections and bear markets. Here are some averages on the 12 bear markets since 1937.

• The average decline was 35.5%.
• Average duration from market peak to bottom of 13.8 months.
• Typical decline of about 20% in the first year.

The interesting additional data is that the two years leading up to the bear markets are, on average, the years with the biggest bull market gains. In the two years before the start of the bear markets, the S&P 500 climbed by an average 58% plus dividends. In the final year before the peaks, the average gain was 25% plus dividends. Comparing the numbers, even if you hold on through the average bear market, owning the stock averages for the two years prior to the start of the bear market leaves you with a larger portfolio value than if you had stayed out of the market and had perfect timing to get back in when the bear hit bottom. The not obvious lesson is that getting out too early can cost you more wealth than staying in through part or even all the bear market.

One feature of my dividend focused strategies is that they rule out the need to try to time when the next bear market or correction will start. I can more accurately predict dividend payments than I can swings in the stock market. My strategies focus on finding dividend stocks with a high degree of confidence in the ongoing dividend payments and buy those stocks to build a growing income stream. If the market declines into a correction or bear market, dividend earnings can be used to buy shares at lower prices boosting both the dividend stream and the capital gains when the market starts the recovery or next bull market. A dividend focused investment strategy allows you to take advantage of the proven techniques of dollar cost averaging and to buy low when fearful investors have panicked.

I recommend that income investors focus on building a portfolio of dividend stocks that balances high yield stocks with those where dividend growth is very predictable. Here are a pair of income stocks that illustrate this combination.

Hercules Capital Inc (NYSE: HTGC) is a business development company (BDC) that makes loans in in the venture capital space. Hercules client companies are growth businesses backed by venture capital investors that need additional capital to fulfil their growth and investment goals.

Loans from Hercules provide debt capital that does not dilute the equity holdings of investors and insiders. Hercules typically receives some sort of equity stake or warrant, so generates additional profits when a client company gets bought out or enters the public markets with an IPO.

This BDC has paid a steady, well covered by cash flow dividend for over five years. The shares currently yield 9.5%.

EPR Properties (NYSE: EPR) is a very well-run net lease REIT that has done a great job of growing the business and generating above average dividend growth for investors. With the net-lease (NNN) model, the tenants that lease the properties owned by EPR are responsible for all the operating costs like taxes, utilities and maintenance. EPR’s job is to collect the rent checks. Typically, NNN leases are long term, for 10 years or more, with built-in rent escalations.

EPR Properties separates itself from the rest of the triple net REIT pack by the highly focused types of properties the company owns. The EPR assets can be divided into the three categories of entertainment, comprised of movie megaplex theaters; recreation, including golf and ski facilities; and education which counts in its portfolio of properties private and charter schools, and early childhood centers.

EPR has generated superior returns for investors by growing its dividend an average of 7% per year for eight straight years. The shares yield 6.8%.