Many retirees find that their income streams are insufficient so they look for additional ways to earn more. With rock bottom interest rates, investors are seeking out high yielding investments. The federal funds rate is still next to nothing, and the classic conservative retirement investments like money market funds and CDs are failing to keep up with inflation.
So where do you turn for more yield, especially if you are close to or in retirement?
- Real estate investment trusts (REITs) allow you to enter the commercial real estate sector without the hassles of property management. They give you a fractional ownership share of a major-league real estate portfolio, with potential for dividend payments and excellent returns. Private REITs are not publicly traded.
- Dividend stocks stood out during the recession, as investors turned to them for cash flow. Commonly, they are issued by established corporations in essential industries.
- Utilities stocks often provide a hedge as they have the potential for nice dividends in good and bad market climates.
- Commodity futures: These include precious metals, oil and gas investments, green energy resources, crops and necessities such as timber and livestock.
- Currencies: When the dollar is weak, funds invested in foreign currencies get a boost as most funds out there are dollar-denominated.
You can invest in many of these asset classes not only via stocks and futures contracts, but via managed funds and exchange-traded funds (ETFs). ETFs are nice, as they don’t cost an arm and a leg to enter. They are tax-efficient, and as they trade on exchanges during the market day, they offer great liquidity and flexibility.
One of my favorite types of income investments is Master Limited Partnerships (MLPs). They’ve outperformed stocks for over a decade. Investors are looking everywhere for better yields – but how many of them look into Master Limited Partnerships?
Many investors have never heard of MLPs. Others have, but assume they are complex and esoteric. That’s too bad, because these investments are capable of generating consistent, sizable dividends. In reality, investing in MLPs isn’t that mysterious. They trade on public exchanges, and today there are even MLP mutual funds and ETFs.
MLPs have outperformed the S&P 500 in 12 of the past 13 years. In fact, they have left stocks in the dust in terms of annualized total returns. From 2002-2011, the average yearly total return for MLPs approached 16%, compared to less than 5% or less each for the S&P 500 and the DJIA. At the end of 2012, MLPs were yielding 6.7% compared to just 2.2% for the S&P 500.
Almost all MLPs are pipeline businesses making money from the processing or transport of oil, natural gas or coal. Thanks to strict environmental regulations, they don’t face much competition – and as they transport these commodities rather than explore for them, they are theoretically less affected by ongoing volatility in commodity prices.
An MLP weds the tax structure of a limited partnership to the liquidity of a publicly traded security. Like a REIT, an MLP pays out nearly all of its free cash flow to investors in the form of quarterly distributions. As MLPs have big depreciation shields resulting from capital expenditures, 80% of their distributions are characterized as tax-deferred return on capital.
There are demerits resulting from this hybrid construction. MLPs are exempt from corporate taxes, and the taxed part of an MLP distribution is taxed as regular income. The tax-deferred part of the payout reduces your cost basis in MLP shares (which are properly called units), and it is taxable when MLP shares are sold. Appreciation in MLP holdings is subject to corporate tax, and MLP investors get K-1 forms instead of annual 1099s.
Consequently, MLPs can be problematic for investors with tax-deferred accounts. Expect intensive paperwork at tax time if you own MLP units.
MLPs attract income-focused investors who want a hedge. Most people invest in MLPs through a holding company. Select ETFs or mutual funds provide alternate points of entry. If you are looking for greater yield and don’t want a lot of risk, you may want to look into this underpublicized investment class.
Want more income ideas? Check out our Global Income Portfolio Service. Finding high yield opportunities in a low interest environment is quite the challenge.
However, our low-risk investing approach focuses on safe, high dividend stocks that can weather any kind of storm that might come our way.