Quit Suffering From Low Yields
This article originally appeared on Traders Reserve.
There are some less traditional income investments that every income investor should know about in this low-interest rate environment. Forget money markets, CD rates and dividend stocks that often don’t even beat inflation (giving you negative returns). Why bother with them when there are sectors and asset classes that offer you double the yield, along with nice capital returns.
Smart investors are finding new high-yield investments within industries that pay out yields in excess of 8% as a result of passing through higher profits from strong operations. The investments you can purchase in today’s market are by design pass-through securities, meaning they pass through 80%-90% of all net income to shareholders in the form of dividends and distributions.
Investments in closed-end funds, master limited partnerships and REITs that are raising their payouts because business conditions are strengthening, not because they are leveraged to the eyeballs like the companies financed by junk bonds or bad mortgage debt.
Here are six high-yield investments every investor should know about:
A closed-end fund is a mutual fund with a constant number of shares. No new shares are issued after the fund is launched and no shares are redeemed for cash or securities until the fund liquidates. The only way an investor can acquire shares in a closed-end fund is to buy existing shares from someone else — as opposed to an open-end fund where the fund company creates new shares on the fly.
Two things distinguish a closed-end fund from an ordinary mutual fund:
1. It’s closed to new capital after it begins operating.
2. Its shares (typically) trade on stock exchanges rather than being redeemed directly by the fund.
The price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium (or discount) placed on it by the market. The total value of all the securities in the fund divided by the number shares in the fund is called net asset value or NAV. The market price of a fund share is often higher or lower than the NAV.
Some examples of publicly traded closed-end funds that pay attractive dividends include:
AllianceBernstein National Municipal Income Fund (NYSE: AFB)
BlackRock Credit Allocation Income Trust III (NYSE: BPP)
BlackRock Global Opportunities Equity Trust (NYSE: BOE)
Credit Suisse Asset Management Income Fund (AMEX: CIK)
Eaton Vance Tax-Advantaged Dividend Income Fund (NYSE: EVT)
Liberty All Star Equity Fund (NYSE: USA)
SPDR Barclays Capital High Yield Bond (NYSE: JNK)
Master Limited Partnerships (MLPs)
Exploration and production companies, natural gas liquids businesses, pipelines and other mature asset-rich businesses that generate large amounts of cash flow find the MLP a naturally attractive structure for maximizing unit holder value. Unit holders, in turn, enjoy enhanced distributions of cash because of the tax shelter provided by the pass-through of the non-cash expenses, at a time when tax shelters are particularly hard to find. Most MLPs offer yields that exceed bond equivalent securities by a wide margin.
MLPs are simply publicly traded limited partnerships that are listed securities on the major exchanges, making for a liquid investment unlike traditional limited partnerships, which are bought and sold in a negotiated illiquid third market.
Here are some of higher-yield MLPs:
AmeriGas Partners LP (NYSE: APU)
Cheniere Energy Partners LP (AMEX: CQP)
Dorchester Minerals LP (NASDAQ: DMLP)
Energy Transfer Partners (NYSE: ETP)
Kinder Morgan Energy Partners (NYSE: KMP)
Martin Midstream Partners (NYSE: MMP)
Natural Resource Partners LP (NYSE: NRP)
ONEOK Partners (NYSE: OKS)
Suburban Propane Partners LP (NYSE: SPH)
Terra Nitrogen Company LP (NYSE: TNH)
Canadian Royalty and Business Trusts
What has been a really terrific development in the past 10 years has been the emergence of natural resource based and other business trusts that are traded as highly liquid public securities. They are also called “royalty trusts.”
One of the great appeals of Canadian trusts is that much, and sometimes all, of the distribution is tax free, because of flow-through depletion allowances and other deductions from items like depreciation of equipment. While that is scheduled to change in 2011, there strong support within the Canadian natural resource industry and with the upcoming elections, the tax free status may be retained. Still, Canadian royalty trusts, with their high dividends, perpetual asset growth model, safe location within a secular energy bull market, makes for a fine core holding within a high-yield portfolio.
Publicly traded Canadian royalty and business trusts that are viable portfolio candidates include:
Enerplus Resources Fund (NYSE: ERF)
Medical Facilities Corporation (OTC: MFCSF)
Pengrowth Energy Trust (NYSE: PGH)
Provident Energy Trust (NYSE: PVX)
Penn West Energy Trust (NYSE: PWE)
Yellow Pages Income Fund (OTC: YLWPF)
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts, or REITs, as they are commonly known, deal primarily with the acquisition and disposition of brick-and-mortar assets in shopping centers, office buildings, apartments, hotels, car dealerships, etc. They trade like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages.
REITs afford individuals the opportunity to invest in commercial real estate that would be unaffordable individually. It also assures liquidity through stock market traded units, even though the large properties invested in might themselves be relatively illiquid. REITs receive special tax considerations, and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Despite the real estate sell-off and the subprime mortgage disaster, there remain attractive REIT investments in growth areas like health care and senior housing.
Some examples of brick-and-mortar REITs include:
American Capital Agency Corp. (NASDAQ: AGNC)
Health Care REIT (NYSE: HCN)
Hospitality Properties Trust (NYSE: HPT)
LTC Properties (NYSE: LTC)
MCG Capital Corporation (NASDAQ: MCGC)
Medical Properties Trust (NYSE: MPW)
Nationwide Health Properties (NYSE: NHP)
Senior Housing Properties Trust (NYSE: SNH)
Universal Health Realty (NYSE: UHT)
Oil/Shipping Tanker Stocks
The price of oil has little to do with the profitability of the tanker operators. Rather, boosting tanker fortunes is the interplay between the balance of worldwide demand for oil and for oil-shipping vessels supply. Driven in large part by increased consumption in China and reinforced by the U.S. economy, global oil demand continues to grow. In addition, there are the tensions in the Middle East. Bracing the upward pressure on charter fees created by demand growth, new rules requiring safer double-hulled vessels have caused a shortage in supply. Bears will argue the supply/demand scenario has tipped against the shippers. But long term, the trend is still working in their favor.
The stocks within this sector that pay big dividends include:
And last but not least, bonds issued by a corporation. Such bonds usually have a par value of $1,000, are taxable, have a term maturity, are paid for out of a sinking fund accumulated for that purpose, and are traded on major exchanges. Generally, these bonds pay higher rates than government or municipal bonds since the risk is higher. Corporate bonds have a wide range of ratings and yields because the financial health of the issuers can vary widely.
Here a few exchange-traded corporate bond funds available:
PIMCO Corporate Opportunity Fund (NYSE: PTY)
BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV)
Chimera Investment Corp. (NYSE: CIM)
New American High Yield Fund (NYSE: HYB)
Credit Suisse High Yield Bond Fund (AMEX: DHY)
DWS High Income Trust (NYSE: KHI)
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