The return you earn on your investments is key to accumulating assets to generate income for the later years of your life. Once you stop working full-time, you then want your investment portfolio to provide a stream of income to pay your bills and support your lifestyle. Obtaining high yields or high enough yields is key to going up and down the retirement mountain.
In this post, I am going to introduce you to a number of available higher returning investments you may want to add to your portfolio. Before making any investment decisions, please make sure you understand what you are buying and that it fits your risk appetite, liquidity needs and investment horizon. Also please remember that in exchange for earning higher income, some of the assets described below may experience more volatility than traditional income investments such as highly rated corporate stocks and bonds.
Here are some of the key higher yielding investments that are available:
Real estate investment trusts (REITs). According to the website, reit.com:
REITs are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate. REITs provide an investment opportunity, like a mutual fund, that makes it possible for everyday Americans—not just Wall Street, banks, and hedge funds—to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced—without actually having to go out and buy, manage or finance property. Approximately 145 million Americans live in households invested in REITs through their 401(k), IRAs, pension plans, and other investment funds.
Average returns on REITs have ranged from 4% to 13% over the past few decades depending upon the type of REIT it is. Remember past performance does not guarantee future returns.
Business development corporations (BDC). A BDC is an organization that invests in small- and medium-sized companies as well as distressed companies. A BDC helps the small- and medium-sized firms grow in the initial stages of their development. With distressed businesses, the BDC helps the companies regain sound financial footing. BDCs are typically public companies whose shares trade on major stock exchanges. As investments, they can be somewhat high-risk but also offer high dividend yields.
Closed-end funds (CEF). A closed-end fund is a mutual fund that has an initial offering (IPO) of shares, and once those shares are sold, no additional shares are issued. Since it is a public offering, closed-end funds must register with the Securities and Exchange Commission (SEC). After the IPO is complete, the shares in a closed-end fund usually trade on major stock exchanges.
There are many types of closed-end funds. The mix of underlying assets in the fund’s portfolio determines the type. For instance, a fund may invest only in blue chip stocks. Another closed-end fund may invest solely in municipal bonds. Regardless of the underlying asset class, closed-end fund portfolios are managed by a separate entity called an investment advisor.
Closed-end funds had an average return of 12.4 percent in 2017, reports CEF Insider. Remember past performance does not guarantee future returns.
Floating rate assets. The possibility that higher inflation will eventually lead to higher interest rates is increasing the attractiveness of floating-rate assets including certain preferred stocks and loans. Unlike bonds that pay fixed rates of interest, floating-rate assets pay interest at variable rates that adjust periodically, based on a publicly available measures, to the then prevailing short-term interest rate. That means floating rate preferred stocks and loans are less likely than most fixed income investments to lose value when inflation and interest rates rise.
Master limited partnerships (MLP). MLPs usually pay the highest yields of any income-oriented asset class. MLPs operate real properties, mostly oil and gas pipelines. MLPs may also benefit if proposed increases in corporate income tax rates come to pass because as partnerships, rather than corporations, as they possess tax advantages that should become increasingly valuable in a higher tax environment.
Each individual MLP is different, but the average MLP distribution is usually around 80% to 90% a return of capital, and 10% to 20% ordinary income.
Dividend paying common and preferred stocks. Dividend stocks are companies that pay out a portion of their earnings to a class of shareholders on a regular basis. These companies usually are well established, with stable earnings and a long track record of distributing some of those earnings back to shareholders. The distributions, usually paid each quarter, are known as dividends and may be paid out in the form of cash or as additional stock. Dividends are always subject to the continued earnings of the paying company and can be cut if the business runs into difficulties.
One way that investors look to protect themselves from not having their dividends paid is to focus their investments on what are called the “dividend aristocrats.” These are publicly traded companies that have consistently increased their dividend yield for at least the past 25 years. These publicly traded companies are some of the best and most reliable investment options for income investors. At present, about 65 companies are listed on the dividend aristocrats list. Look to S&P Global for more information.
Summary
Investors interested in higher yielding income strategies should do their research on the options available. I have been pleasantly surprised with the number of different types of securities that I have been able to find that match my risk, liquidity and return needs. The key is to only put your money to work if you completely understand the investment and that it matches your individual needs. Best of luck in your search for higher yielding investments.
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