Low-risk, high-return investments have become scarce in the low-interest environment that followed the 2008 financial crisis.
Historically, income investors could get respectable yields from an array of relatively safe investments, such as bonds, certificates of deposit (CDs), and, at one time, savings accounts.
But nearly seven years of zero-interest rate policies by the U.S. Federal Reserve have dragged down returns on all interest-dependent investments to the point where they're almost not worth the bother.
The 10-year U.S. Treasury Bond yield is just 2.42%. Bank savings accounts typically pay fractions of 1%. (Does anyone remember when just about every bank in town paid 5.25% interest on a savings account?)
CD rates are abysmally low. According to Bankrate.com, a one-year CD this week pays a yield of just 0.27%. A five-year CD has a yield of 0.87%.
Tiny yields like that have little appeal to any investor.
And the situation doesn't figure to improve any time soon. While Fed Chairwoman Janet Yellen has hinted at a possible rate hike later this year, any increase will be too small to have much impact. Normalization of interest rates will take years.
But the need for income-producing high-yield investments has not gone away. And it has led some income investors to consider risky alternatives.
Junk bonds top that list. They offer higher rates of return, but carry much more risk than what's known as investment-grade bonds. When interest rates rise, not only will the value of a junk bond drop, but it's more likely to default.
High-yield stocks also can look like a good high-return investment. Not all high-yield stocks are bad, but it's easy to get burned.
A company in trouble will chop its dividend, which usually means a big drop in the stock price - and lost capital. Even if a company is doing okay, a suspiciously high dividend that exceeds earnings is unsustainable. And it means a costly dividend reduction is likely.
Still, it's not impossible to find good high-return investments today. Here are three kinds with the best prospects...
Where to Find High-Return Investments Today
These high-return investments are all stocks, but they're special types of stocks. Each is designed to pass profits through to investors, which makes their dividends much less risky than the kind of high-yield stocks described above (which often have yields in excess of 10%).
The high-return stocks in these three categories generally have yields of between 3% and 8%. In addition to that, choosing wisely will give you a rising stock price and capital appreciation.
Let's take a look at each.
High-Return Investments No. 1 - REITs
REITs are real estate investment trusts, but trade like any other stock. REITs hold commercial properties, such as shopping malls, office buildings, and hotels. The rent paid by tenants is their revenue stream. Another, somewhat more risky type of REIT is a mortgage REIT, which invests in the loans on commercial properties.
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REITs are required by law to pay out at least 90% of their taxable income to shareholders. The average REIT dividend is about 4%. Most investors pay ordinary income tax on their REIT dividends.
Some fear the impact of higher interest rates on REITs, but historically this high-return investment has actually fared slightly better when rates are rising than when they're falling.
Money Morning recommends: American Tower Corp. (NYSE: AMT), a REIT that owns 70,000 wireless and broadcast towers around the world. Current yield is 1.9%.
High-Return Investments No. 2 - MLPs
MLPs are Master Limited Partnerships. An MLP must generate 90% of its revenue from real estate, commodities, or natural resources. But most MLPs operate in the oil and natural gas sector.
The partnership structure means you get a "distribution" rather than a dividend. It also means you need to fill out a K-1 form with your taxes. All the profit goes to the shareholders, but very little of it is taxable because the money comes from depreciation allowances. Capital gains taxes are paid when the shareholder sells.
The average yield for an MLP falls between 6% and 8%.
Money Morning recommends: Crestwood Midstream Partners LP (NYSE: CMLP), a natural gas MLP that operates pipelines and storage facilities in the top shale formations in the United States, such as the Bakken, Eagle Ford, Permian, and Marcellus. Current yield is 14.50%.
High-Return Investments No. 3 - YieldCos
A YieldCo is the alternative energy version of an MLP. Almost all YieldCos are solar and wind energy companies. A YieldCo is created by a parent company to hold and operate finished projects. The sale of energy produced generates the revenue.
But unlike MLPs, YieldCos pay conventional dividends. All the tax reduction is done at the corporate level. YieldCos pay out about 80% to 85% of the cash available for distribution. YieldCo dividend yields range from 3% to 6%.
Money Morning recommends: 8Point3 Energy Partners LP (Nasdaq: CAFD) is a joint venture of two of the solar industry's biggest players, First Solar Inc. (Nasdaq: FSLR) and SunPower Corp. (Nasdaq: SPWR). While currently trading below its recent IPO price of $21, that price should rise as more projects come online. Current yield is 4.64%.
Or Try a High-Dividend ETF: This type of exchange-traded fund lets investors own a group of dividend stocks with good yields. But by owning them as a group, it spreads the risk while maintaining the income. Here are a few of the best high-dividend ETFs to consider...
Follow me on Twitter @DavidGZeiler.
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.