10 Investments with High Yields

It was easy to earn investment yields of 5% just five years ago. In 2007, one-year Certificate of Deposit (CD) rates averaged 5.443%, while five-year CD rates averaged 5.526%. Today, one-year CD rates are averaging a paltry 0.31%, while five-year CD rates are at 1.07%. Clearly, investors looking for yields of 5% or more cannot turn to the safety of CDs. Rather, investors need to accept risk to get 5% yields, and need to be creative. Here are 10 investments with yields of 4%, 5% or more even in today’s ultra-low interest rate environment.

Managed payout funds are specifically designed to transform savings into an ongoing stream of income. They are mostly marketed towards retirees facing the problem of turning their retirement nest eggs into steady sources of retirement income. However, they can be used by other people desiring high payouts.

There are two types of managed payout funds. The first type is designed to preserve or even grow the investor’s principle while providing regular payouts. For example, Vanguard offers three managed payout funds designed to preserve capital while making monthly payouts at rates of 3%, 5% or 7%. The tradeoff for selecting a higher payout rate is that the principle is less likely to grow to keep pace with inflation. If the fund pays 7%, the fund manager must earn at least that to avoid dipping into principle.

The second type of managed payout fund is designed to pay out as much income as possible over a set time frame, at which point the principle itself will be exhausted. These funds are referred to as income replacement funds, and they are marketed for people who would like to replace their income for a set period of time, such as an early retiree looking to fill the income gap between retirement and the start of pension payments. Fidelity offers a set of income replacement funds with different exhaustion dates. As an example, Fidelity’s Income Replacement 2022 fund (FIRMX) is set to exhaust its principle in 2022.

Unlike CDs, the regular payments from managed payout funds depend on the performance of the stock and bond markets, and the payout amounts can increase or decrease from one year to the next. Also, while the payout amounts are relatively high, payouts can include both earnings and return of principle. The income replacement funds, in fact, are actually designed to include a return of principle as part of their monthly payouts, since their principle eventually becomes exhausted at their exhaustion dates. Thus, one must be careful to distinguish between the payouts from these funds and their earnings.

Floating rate funds are portfolios of short-term loans made by banks to corporations in need of cash. While the current yields of floating rate funds have decreased to the 3% to 4% range due to today’s ultra- low interest rate environment, these yields should quickly return to the 5% range if interest rates rise since the short-term loans are based on the LIBOR, prime rate or other interest rate benchmark. The Fidelity Floating Rate High Income Fund (FFRHX) currently yields a healthy 30-day yield of 3.59%.

High-yield bonds hold debt issued by companies whose credit ratings are below investment grade. They are also known as “junk” bonds because of the relatively high risk that these companies may need to default on their debts, thereby leaving the holders of these bonds with junk paper on their hands. It is fairly easy to find junk bond funds with yields or 5% or higher. For example, the Vanguard High-Yield Corporate Fund Investor Shares fund (VWEHX) has a current 30-day yield of 5.24%, and the Fidelity High Income Fund (SPHIX) has a 30-day yield of 5.95%. Although these are bond funds, they can be volatile since the credit risk for the companies that issue these bonds depends on the state of the economy.

Emerging-market bond funds hold debt issued by emerging markets such as the so-called “BRIC” countries (Brazil, Russia, India, China), or other investments economically tied to these markets. For example, the Fidelity New Markets Income Fund (FNMIX) currently sports a 30-day yield of 4.35%. As with junk bond funds, emerging market bond funds can be volatile due to instability in these markets.

There are a number of well-known stocks that pay dividends of 5% or higher. For example, AT&T, Inc. (T) is currently paying 5%, while Verizon Communications (VZ) is paying dividends with a yield of 4.6%. High-yield stocks tend to be clustered in the telecommunications, chemical and pharmaceutical fields.

When selecting a high-yield stock, care must be taken to avoid buying stocks that have high yields simply because their prices have dropped precipitously. Such price drops often foreshadow large dividend cuts.

Real Estate Investment Trusts (REITs) are entities that invest directly or indirectly in real estate, and sell securities that trade like stocks. REITs can own different types of real estate, such as hotels, apartments, shopping malls, self-storage centers, office buildings and warehouses. Dividend yields from REITs tend to be high because they are required to pay at least 90% of their annual income to their shareholders. Some REITs that have dividend rates of around 5% are Health-Care REIT, Inc. (HCN), which is paying 4.9%, and Hospitality Properties Trust (HPT), which is currently paying a very attractive dividend of 7.6%.

Master limited partnerships (MLPs) own energy infrastructure like pipelines and storage facilities that are used to transport energy. As with REITs, MLPs are required to distribute their income directly to their partners and limited partners. As a result, the payouts from MLPs tend to be high. For example, Enterprise Product Partners (EPD) is an MLP with distributions yielding 4.8%. Potential investors in MLPs need to be aware that MLP investments can create significant tax issues due to their partnership structure. For many people, these issues are enough to make direct MLP ownership unattractive.

Public Income Notes, or PINES, are unsecured notes issued by public companies that trade on stock exchanges and also pay interest. PINES tend to pay a fixed amount of interest on a periodic basis. For example, the General Electric Capital Corporation PINES (GEC) pays a fixed dividend of $0.381 per quarter, which works out to a payout rate of 5.8% at today’s closing price of $26.17 per share.

TRust Preferred Securities, or TruPS, are something of a hybrid between stocks and bonds, except they have a longer term, make quarterly fixed income payments, and mature at their face value. An example is the Goldman Sachs HJG TruPS (HJG), which is currently paying dividends at a rate of 5.7%.

Another way to get enhanced dividends is to use a leveraged closed-end bond fund. The use of leverage allows such funds to provider higher distributions than non-leveraged funds. A good provider of such funds is Nuveen Investments, and an example is the Nuveen Build America Bond Opportunity Fund (NBD), which has a current distribution rate of 5.73%. Readers are encouraged to study Nuveen’s website for further information about these funds, including their risks due to the use of leverage.

Investors can still find yields of 5% or more in today’s ultra-low interest rate environment. But to get these yields, they need to do more than buy a CD at their local bank branch. They need to be more creative in the investments they make, and need to understand the higher levels of risk involved. As with many investing strategies, it makes sense to diversify by selecting several of these investments.