by Jim Woods | January 26, 2012 1:00 pm
Capturing big dividends, big yield and healthy price appreciation is the perpetual quest for income investors.
In 2011, that mission was made a little bit easier courtesy of a volatile equity market, as money flowed away from riskier assets and moved into dividend-stocks and bonds. So far this year, we’ve seen more capital flow into risk assets like tech and growth stocks, and out of traditional dividend stocks and Treasury bonds. For income investors, this scenario means seeking out alternative ways to get the necessary dividend and yield.
Fortunately, the explosion in the number of income-oriented exchange-traded funds that have come to market in recent years has made this perpetual quest a lot easier.
When I talk about alternative income ETFs, I’m talking about real estate investment trusts, or REITs; master limited partnerships, or MLPs; closed-end funds; Canadian royalty trusts and preferred stock funds. These alternative income investments can be used to enhance an income portfolio’s yield, and they also can be used to diversify an income-generating portfolio.
One of the more intriguing alternative income funds available now is the Alerian MLP ETF (NYSE:AMLP). A relative newcomer to the world of ETFs, this fund is a powerful mix of 25 energy infrastructure master limited partnerships. The unique structure of this fund allows for the elimination of any K-1 tax reporting, yet the fund still pays qualified dividends to shareholders.
Think of AMLP as an energy play, because as North America’s energy transportation dynamics change, billions of investment dollars will be required for new natural gas and oil pipeline infrastructure. That puts energy MLPs at the forefront of this growth trend.
So far this year, AMLP is up 1.6%, which is solid, but not red-hot. However, during the past three months, the fund is up 5.3%. Along with this upside, AMLP has a yield (as of Dec. 31, 2011) just above 6%.
AMLP has an expense ratio of 0.85%, slightly higher than the 0.58% average for its category. Yet AMLP is well worth the added expense considering the diverse mix of MLPs you get.
Another great alternative income ETF is the Guggenheim Multi-Asset Income (NYSE:CVY). This fund is the most eclectic fund of the group, as it contains a host of different types of high-yield securities. The fund holds a bevy of high-profile dividend stocks, including Chevron (NYSE:CVX), Enterprise Products (NYSE:EPD) and General Electric (NYSE:GE), but the fund also holds REITs, MLPs, closed-end funds and even traditional preferred stocks.
Owning CVY gives you the best of the best when it comes to income securities, all at a quite acceptable 0.65% expense ratio, which is just slightly higher than the category average of 0.37%. CVY is up 3.7% YTD, and it boasts a yield of 5.42% as of Dec. 31.
As for preferred stocks, they’ve been on fire so far in 2012. The iShares S&P U.S. Preferred Stock Index Fund (NYSE:PFF) is up 5.4% year-to-date, and as of Dec. 31, 2011, the fund’s yield was a robust 6.99%.
This is an ETF that gives you the diversification that comes with holding the preferred shares of some of the world’s best companies. Firms such as HSBC Holdings (NYSE:HBC), General Motors (NYSE:GM), Wells Fargo (NYSE:WFC) and many others have issued high-yield preferred shares, and the easiest — and least expensive — way to own a piece of all of these is to own PFF.
As an added bonus, PFF has an expense ratio of just 0.48%, which is less than the category average of 0.51%.
If you’re looking for ways to pump up your income portfolio, think outside traditional dividend stocks and bonds — and start getting alternative.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.
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