With yields on bonds stuck in the basement this year, it’s difficult for investors to generate income from their nest eggs. The 10-year US Treasury yielded less than 1% in mid-March…30-year Treasuries were at just 1.56%…and US corporate bonds were averaging 3.2%
It could remain a low-rate world for many months or even years amid anemic global economic growth, restrained inflation and investor fears over the coronavirus pandemic, which led the Federal Reserve to further slash its benchmark interest rate. Good news: There are plenty of higher-yielding investments, but you need to be savvy about the risks of each. To help, Bottom Line Personal asked four financial experts to choose their favorite investments now for yields above 3%…and yields above 7%.
Yields More Than 3%
You can find undervalued dividend-paying stocks providing yields that are much higher than the recent average yield of 2.2% on stocks in the S&P 500 Index, with comparable or lower risk. Where to look…
Cash-rich real estate investment trusts (REITs) typically own commercial real estate that is leased out to tenants. They pay no corporate taxes as long as they distribute most of their taxable income to shareholders. Low interest rates tend to boost REITs by reducing their financing costs to buy more properties and expand.
My favorite REIT now: Realty Income (O) owns 6,400 properties across 49 states. Most are stand-alone retail sites in high-foot-traffic areas leased to long-term tenants that are well-protected from e-commerce and economic downturns, including Dollar General, FedEx and Walgreens. Recent yield: 3.9%. 10-year annualized return: 12.4%.
Charles Sizemore, CFA, is principal of the investment-advisory firm Sizemore Capital Management, Dallas, and coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. SizemoreCapital.com
Discounted Dividend Aristocrat. There are just 64 stocks in the S&P 500 that have raised dividends every year for at least the past 25 years. The consistency of these so-called Dividend Aristocrats indicates robust balance sheets and management that puts a priority on rewarding shareholders.
My favorite Dividend Aristocrat now: AbbVie (ABBV) is the eighth-largest drug company in the world. Its stock stumbled last year as investors worried that patent exclusivity on Humira, its blockbuster autoimmune drug, runs out in 2023. Those concerns are overdone. AbbVie—which was spun off from Dividend Aristocrat Abbott Laboratories in 2013—has a strong pipeline of new drugs and recently acquired pharmaceutical company Allergan, which produces the cosmetic and migraine treatment Botox. Recent yield: 5.5%. Five-year annualized return: 11.7%.
Kelley Wright is managing editor of the Investment Quality Trends newsletter, San Juan Capistrano, California, and author of Dividends Still Don’t Lie. IQTrends.com
Yields More Than 7%
For yields above 7%, consider…
Blue-chip business development corporations (BDCs). These typically provide management advice and make loans to private companies. Like REITs, they offer relatively high yields because they avoid corporate taxes by paying out most of their annual cash flow to shareholders.
My favorite BDC now: Main Street Capital (MAIN) has more than $3.7 billion in capital invested in about 200 promising private companies including a sport-fishing-boat manufacturer and a medical-billing company for physicians. Recent yield: 8.7%. 10-year annualized return: 13.2%. —Charles Sizemore, CFA.
Closed-end funds (CEFs). These operate much like traditional actively managed mutual funds except that they offer a fixed number of shares and trade like a stock on an exchange. That means you sometimes can buy them at a discount when their shares sell for lower than the value of the fund’s underlying holdings (known as net asset value). Important: Many CEFs offer high dividend yields because they use leverage—borrowing money to fund asset purchases—to increase returns. That strategy is a double-edged sword. It improves returns when stocks rise but creates steeper losses when they fall.
Attractive CEF now: Cohen & Steers Infrastructure Fund (UTF) invests in 350 dividend-paying companies that provide fundamental public services, including US railroad operator Norfolk Southern Corp. and British utility National Grid. The fund’s substantial use of leverage makes it 10% more volatile than the S&P 500, but its performance ranks in the top 1% of its category for the past one-, three-, five- and 10-year periods. Recently, it was selling at a 9.6% discount to its net asset value. Recent yield: 7.8%. 10-year annualized return: 10.4%.
More conservative CEF: Cohen & Steers Limited Duration Preferred and Income Fund (LDP) is about half as volatile as the Cohen & Steers fund above. That’s because it focuses on the preferred stock issued by global companies including financial institutions such as JPMorgan Chase and Credit Suisse Group and insurers such as Prudential Financial and MetLife. Preferreds are hybrid investments—part stock and part bond—that pay a fixed monthly or quarterly dividend. They have less potential for capital appreciation than common stock but are considered less risky. If a company runs into financial difficulties, its preferred stock shareholders will be paid their full dividend before dividend payments to common-stock shareholders are considered. The fund, which was launched in 2012, recently sold at a 5.7% discount to its net asset value. Recent yield: 7.1%. Five-year annualized return: 4.4%.
Robert Carlson is editor of the Retirement Watch newsletter and a managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com
Turnaround stocks. Some dividend-paying companies have seen their stock prices hurt by financial setbacks. They offer attractive yields because their stock dividends are priced high relative to their depressed share prices. They will reward investors if they are able to generate enough cash flow to sustain their dividends while they get their businesses back on track.
My favorite turnaround stock now: Signet Jewelers (SIG) is the world’s largest diamond jewelry retailer, with more than 3,300 stores and major chains such as Kay, Zales and Jared. The company ran into trouble about five years ago because many customers with easy financing terms from Signet’s in-house credit operations defaulted on loans…and because sales at regional malls shrank. A new CEO has outsourced the credit operations, improved employee relations and focused on building online sales and marketing. Recent yield: 10.4%. 10-year annualized return: –2.9%.
Bruce W. Kaser, CFA,is associate editor of The Turnaround Letter, Boston. Its model portfolio has produced annualized returns of 9.2% over the past 20 years, vs. 6.4% for the Standard & Poor’s 500. TurnaroundLetter.com