I've been dismayed lately, as many of us have been, by the low interest rates we're getting on our CDs and savings accounts. If we are retired or approaching retirement, we may be especially upset by these low rates.
Fortunately, we have options. Even in today's low interest rate environment, many stocks and funds offer attractive dividend yields.
I would never advocate putting all of your eggs in any one of them, but rather to spread around a good chunk of your savings in these assets if you need current yield. As discovered by my pal Phil DeMuth, and often utilized in his rapidly growing client base at Conservative Wealth Management, here are a few options for high current yield with safety.
The iShares Lehman Aggregate Bond (AGG) exchange traded fund (ETF) largely owns bonds of investment grade and steers well clear of the subprime mess. Experts are expecting more defaults on bonds through next year, but the default rate lately has hovered at or close to zero so even a jump will not significantly affect a large mix of bonds. AGG's trailing twelve month yield (TTMY) is 4.8%. (Note: The trailing twelve month yield, used throughout this column, is not the same as the current yield. As the price fluctuates, the yield changes even if the dividend stays constant or rises. Check with Yahoo! Finance for the latest yield figures.)
The Cohen & Steers Dividend Majors (DVM) ETF is comprised of many high yielding real estate investment trusts (REITs). As any reader of this space knows, I love REITs for their yields. Yes, I know they took a huge drop last year. But that only increased their yield. They are recovering now and so the yield is falling. But the trailing twelve month yield is 6.5% and that looks good enough to eat.
BlackRock Global Energy and Resources (BGR) holds high yielding energy stocks from all over the globe. I happen to think oil prices are in a bubble (I could well be wrong). But even if they are, with a yield like 8.7%, BGR could lower its dividend and still be doing fine.
Templeton Emerging Markets Income (TEI) contains bonds of emerging markets. These bonds are often issued by nations that are in better economic shape than the US is right now by virtue of running budget surpluses and trade surpluses. With a yield of 9.1% it's good enough for me and own it I do.
Black Rock Dividend Achievers (BDV) is comprised of high dividend stocks. It has an amazing yield of 6.9% and while its price will fluctuate like mad as markets move, its yield is positively mouth watering.
Great Northern Iron Ore (GNI) mines, well, iron ore, in Northern Minnesota. Its 6.9% dividend rate tells us that world demand for iron ore remains robust.
BP Prudhoe Bay Royalty Trust (BPT) pays you a royalty on the oil taken from a series of oil fields near Prudhoe Bay. Its yield for the past 12 months was a stunning 10.4%. As the price of oil rises, it could do even better but might not as a ratio of price.
Bank of America (BAC), the nation's second largest bank, has been stung by sub-prime and other poor investments. It's possible that it will cut its lofty 7.1% dividend, so if you are really, really cautious, you might wish to stay away. Even if it were cut by 20%, however, it would still yield north of 5%, which isn't bad at all.
Consolidated Edison (ED), which New Yorkers know as Con Ed, is an immense electric utility. It's paying a fabulous 5.6% yield. It is regulated, although not as much as it once was, so the yield is fairly safe.
General Maritime Transport (GMR), a firm that transports oil, that most precious of commodities, across the seas, pays a 6.9% yield. Looks good to me.
Now, the REITs mentioned here will not, repeat NOT, qualify for the super low Bush dividend taxation rate. Neither will the oil royalty trusts. And neither will the bond fund at the top (AGG) or in the middle (TEI). But the yield on all these remains excellent.
The strategy here is to not buy just one of these investments. As always, diversify. I would also highly recommend that you talk to your own financial advisor, and you should have a financial advisor. He or she may have his or her own ideas. But this is a start towards a Stein/DeMuth High income portfolio you might like.
Investor Village
Some suggestions for income investing when interest rates are low…….or high:
1. Don't buy CDs from your local bank. Most of the brokerage firms offer CDs from around the country and they usually have higher yields than most “local” CDs. Plus you're not using gas!
2. If your portfolio is 100% fixed income, inflation will kill you over a period of years. You need stocks and funds which have a history of raising their dividends. Note: The payments on closed end funds are distributions, not dividends. For example, BDV, mentioned in the article, has a distribution rate which is much higher than the dividends of the underlying stocks. In other words, it's paying the distributions from principal. This is why it's constantly going down. See chart at http://www.etfconnect.com, the best url for ETF information. How do you evaluate the distributions to see if they are being paid out of dividend income? Usually, you can take the top 10 holdings and get the individual yields, then compare that to the distribution rate.
3. Don't stretch looking for yield. Jim Rogers says, “Never, never, never buy a stock just for the dividend.”
4. Identify the sectors of high yielding stocks, then look for the best stocks in that universe or buy ETFs which own them and have the distributions being paid from the dividends. The three highest yielding area now are utilities, oil and gas master limited partnerships and real estate investment trusts. In the current market, it's probably not a good idea to have any REITs. Oil and gas limited partnerships are complicated; it's best to buy the ETFs that own them AND the distributions from the ETFs are dividends within the meaning of the tax laws, thus they don't have any adverse tax consequences that owning the individual partnerships do. If you go to the above url and enter “energy” in the search box, the partnership ETFs are the first group.
5. On the fixed income of your portfolio, ladder the maturities of the individual CDs, bonds and preferreds. Don't buy bond funds that have no ending date; you loose the advantage of the bonds going back to par at maturity. For preferreds, a great url is http://www.quantumonline.com. For current new bond rates, the best url is http://www.internotes.com. You may want to consider staying away from financial company bonds until the dust settles.
6. Have a plan and stick to it.
nice comments.
i add the following to your point #2–go to the following site to get “income only yield” and “distribution yield”. Of course this does not mean they are not “earning” enough to support the distribution through income, cap gains, etc, but it does tell you the portion applicable to “income”.
Your point # 4–need to add Ocean shipping to this list–as a group, they pay higher dividends now than anything else i know.
good luck
oops the www for comment #2 is
http://www.closed-endfunds.com/FundSelector/FundDetail.fs?ID=93362