High yield savings accounts are a great place to stash cash for an emergency fund but the interest earned is not likely to keep up with inflation. For investors that are looking for high yields that will surpass that of inflation, three investment options to produce income are high yield bonds, master limited partnerships (MLPs), and real estate investment trusts (REITs).
High yield bonds, MLPs, and REITs are a great way to increase your portfolio’s dividend income. Most of these investments had very little price action until the current recession started. When the economy starts to recover, these investments will move with the market and feed you a nice monthly dividend. The following investments are worth a look if you are building an income portfolio.
High Yield Bonds
iShares Corporate High Yield Bond ETF (HYG) that offers an 11.56% yield gives investors a diversified high yield corporate bond portfolio through one ETF. Another way to invest in high yielding corporate bonds is through the SPDR Barclays Capital High Yield Bond Funds (JNK), which yields 14.86%. Note these high yielding bonds carry more risk than the investment grade bond ETFs such as iShares Investment Grade Corporate Bond ETD (LQD) yielding only 5.96%.
Oil/Natural Gas Trusts
Pengrowth Energy Trust (PGH) is Master Limited Partnership (MLP) based in Canada, which explores and develops oil and natural gas operations. If you are looking for high yield exposure to oil but with a diversification of natural gas, try PGH, which yields 12.6%
Penn West Energy Trust (PWE) is another Canadian based oil and natural gas trust that yields 11.2%.
MLPs have a different tax structure; one that taxes dividends as ordinary income. With Canadian Trusts, you will pay a foreign tax on the dividends before you receive the dividend. This foreign tax is deductable from your end of year taxes.
Real Estate Investment Trusts (REITs)
Most individual investors do not have, or access to, the funds required to purchase real estate but through REITs small investors have a wide variety of real estate from which they can choose to invest in. I have listed three REITs below that you might want to look into.
Entertainment Properties Trusts (EPR), currently yielding 12.5%, is the largest Real Estate Investment Trust. EPR holds a variety of entertainment properties from movies theaters, which makes up about 50% of its holdings, to retail centers and land leased out to restaurants.
Health Care Property Trusts (HCN), currently yielding 8.5%, invests in real estate used for medical purposes ranging from senior housing to medical office buildings.
Vanguard REIT ETF (VNQ), which currently yields 12.26%, is an exchange traded fund, or ETF, that diversifies its holdings through various REITs. If you want to invest in REITs but want one diversified holding, this would be the ETF for you.
Bond ETFs and MLPs usually pay a monthly dividend, which makes them attractive to income investors. Please research the risks associated with each investment before investing. The companies listed above are just a few within their respective market.
Note: Tax rates on some of the above investments are that of ordinary income. With the recent rally, I would expect most of these investments to come down in price.
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