These Overlooked Income-Generating Assets Are the Antidote for a Bummer Market

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income-generating assets - These Overlooked Income-Generating Assets Are the Antidote for a Bummer Market

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Pity the company CEO or the fund CIO that goes month after month and year after year without a single invitation to be a talking head on CNBC.

They and their teams toil away generating big dividends each and every month, quarter after quarter, all without the glory of the mainstream financial media. Sure, they might get a mention on Bloomberg TV, but the only folks that watch that network are like me: interested in facts and judgments, not hype and hyperbole.

But these are the people that investors really need for reliable income. Sort of like the old Maytag appliances before Whirlpool (NYSE:WHR) did its takeover — solid, if not boring, machines that left repairmen sitting around twiddling their thumbs.

With the general stock market as measured by the S&P 500 Index stalled out for the year, dividends and income make for a much-better proposition for all investors … even if it doesn’t attract the spotlight.

If you see U.S. Treasuries rising in yield and dropping in price as a warning against income investing, I’ll show you that these four ignored investments offer an antidote for a bummer of a general bond market.

Let me start with one of the uncomplicated ways of bolstering your income, whether U.S. interest rates keep rising or flatten out.

Overlooked Income-Generating Assets

Floating rate bonds are issued by numerous companies as part of their capital formation to match up with revenues to service debts. Expanding economies tend to be better for businesses that sell more goods and services resulting in higher revenues. So, during better times, they can afford to pay a bit more in interest on their bonds.

But during softer economic times with fewer business revenues, interest rates tend to drift lower, which then saves companies interest costs with bonds that have interest rates that float rather than remaining fixed.

There are other means for companies to minimize interest costs with floating rate bonds involving various hedging strategies, but for investors, the bottom line is that floating rate bonds are great to get paid more in rising rates environments with less price risk.

One of the best ways to cash in on floating rate bonds is via a closed-end fund called the Blackrock Floating Rate Income Strategies Fund (NYSE:FRA). Managed by the uber-fund management company, Blackrock — it has a great collection of well-researched floating rate bonds.

Dividends from the fund are paid monthly and are currently running at 6.1 cents per share providing a yield of 5.18%. And over the past two years, as rates have been on the rise, the fund has been generating an average annual return of 8.66%. But even better is that you can buy it today at discount to the net asset value (NAV) of its portfolio of 5.24%.

Next is the misnamed asset class called “preferred stock.” While aptly named for its preference in credit over the lowly “common stock” – preferred stock is always left in the dusty corner of the stock exchanges as common stock is hyped as the way to go by the talking heads on CNBC.

But with common stocks remaining stuck in limbo for the past few months, preferred stock with their usually fixed higher dividends are a much better prospect for not just better income, but better total returns right now.

Like with the floating rate bonds, one of the best means to cash in on preferred stocks is in a favored closed-end investment fund run by my pals in Pasadena, California just around the corner from one of my old offices on Colorado Boulevard.

The Flaherty & Crumrine Preferred Income Opportunity Fund (NYSE:PFO) is a well-run investment fund with a great collection of higher-paying preferred stock primarily from U.S. companies along with some from Europe and Australia.

Dividends are paid monthly and are currently running at 6.6 cents per share providing a yield of 7.33%. And despite the attractive portfolio and yield, the fund is trading right now at a discount to its NAV of 4.77% making it an even better preferred buy right now.

Next up is an idea that that most investors never think about when it comes to investing. Most investors looking at mutual funds either open or closed — think only of the funds themselves and not the actual fund management companies behind the funds.

This is a big mistake. As a former member of some fund management companies, I can tell you that there is plenty of money that can be earned in the business.

And it’s not solely about being a great manager as it is about just attracting and keeping assets in the company under management. Because the more that you have and keep, the more revenue that you earn as you’re paid as a percentage of assets under management (AUM).

One of my favorite asset management companies, particularly for fixed-income, is the New York-based AllianceBernstein Holding LP (NYSE:AB). AllianceBernstein has $549 billion in AUM which has been on a bit of a rise over the trailing year.

It is set up as a passthrough, meaning that it doesn’t have to pay corporate taxes, leaving more cash available for dividends for shareholders. The dividends fluctuate a bit with profits each quarter but with the current quarterly dividend of 73 cents a share, it provides a yield of 10.30%.

And with the shares trading at a discount to its trailing sales, it is also a bargain in the current market.

Last up is another idea that is missed by most individual investors. When you think about mortgages, you probably think about the ones that you have to fund your properties. But for me, I think of them as great income-producing assets as I used to trade them in a former career.

Mortgages come in many flavors in the markets. And they behave in markets based on a variety of factors. So, even if you think that rising current mortgage rates means falling prices — that’s not the case for all mortgage bonds or other securities backed by mortgages. The key is to know the underlying structure of mortgages including their default rates, credit characteristics and their pre-payments of principal when they are refinanced or not.

Now, buying individual mortgages can be a minefield for individual investors. But I know some bright folks that know what they are doing in buying and managing a portfolio of mortgages. They are so good, that they managed to be largely profitable even during the crisis years of 2007-2008 in the U.S. market.

MFA Financial (NYSE:MFA) is structured as a real estate investment company (REIT) that runs a mortgage portfolio that avoids corporate taxes by paying out the majority of profits to shareholders. And it does a good job of it, generating a total return over the past ten years of 280.44% or an average annual return of 14.29%.

Dividends remain ample at 20 cents per share providing a yield of 10.27%. Even better: You can buy this REIT pretty much spot on to the current net value of its book of mortgages and other assets.

Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/these-overlooked-income-generating-assets-are-the-antidote-for-a-bummer-bond-market/.

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