Going for Yield: Income Opportunities Beyond Bonds

One of the consequences of the Great Recession has been stunningly low interest rates.  The current yield on 10-year U.S. Treasury bonds is just 2%. If you go out even further and buy 30-year Treasuries, you could get as much as 3%. 

What boggles the mind is that the current rate of inflation is estimated at 3.5%.  At these levels, buyers of the 30-year bonds are willing to systematically lose purchasing power over time. (That is, before including the impact of taxes on their interest payments.)

Meanwhile, there are some other ways to get good cash flow on investments that have the potential to make even bigger payouts in the future.   I’m generally finding opportunities in 3 areas, with annual distribution yields in the 5-10% range.  All of these companies can be held within a standard brokerage account. 

Ticker symbols and current distribution yields are shown in parenthesis.

1) Royalty Trusts: These are resource-based companies (oil, natural gas, etc.) that are tied to production from specific areas. My favorites include BP Prudhoe Bay (BPT, 8.4%), ECA Marcellus (ECT, 10.2%), and MV Oil Trust (MVO, 9.0%).

There is a caveat here — at some point, these holdings will “tap out ” on production once the wells go dry.  But meanwhile, they provide a great hedge against inflation and improvements in technology may continue to extend the lifetime of these assets…

2)  Master Limited Partnerships.  Similar to REITS, MLPs must pay out 90% of their profits in exchange for favorable tax treatment.  Typically, MLPs generate income from energy pipelines or storage facilities. 

Energy Transfer Partners (ETP, 8.1%),  Calumet Specialty Products (CLMT, 10.8%), Plains All American Pipeline (PAA, 6.2%)

There are also some tax advantages to investing in MLPs.  Notably, much of the income generated by these investments is tax-deferred.  (Direct investment in MLPs is not appropriate for retirement accounts due to complications of the tax code).

3)  Telecom Stocks, plain and simple.

 Telstra (TLSYY, 8.7%), Verizon (VZ, 5.5%), AT&T (T, 5.9%)

If you want to tweek yields even further, consider putting in a good-till-cancelled limit order to buy at 10% below present prices.  This will cushion your downside risk,  and boost yields once you get in. 

There are a whole world of possibilities out there, but I’m still keeping a fair amount of cash in my accounts for the purpose of safety.

Note:  In the interest of disclosure, I currently hold shares of BPT, ECT, ETP, TLSYY.

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