For the past decade, the Federal Reserve has used its powers to keep both short term and long term interest rates on government bonds low. This had the effect of driving down rates in the private markets to historical lows, forcing investors to take on more risk in order to earn a few pennies on their dollars. Without the risk, a $500,000 portfolio may have earned less than $5000. Few people could afford to do that.
Now, markets have changed. Rates have climbed considerably and, in my opinion, one may start looking at income oriented investments again that produce reasonable cash flow for the risks being taken.
Below are a few ideas I'm discussing with clients now. They may or may not fit your situation. What's written below is by necessity not all encompassing. Any investment requires more discussion and detail. If you want to learn more, please contact us for all proper disclosures and documents.
One note - it's important to always understand that stock company dividends are not guaranteed and are generally declared each quarter by the board of directors. Companies have reduced or eliminated dividends in the past.
*Source: Yahoo Finance
Quality Corporate Bonds are now, in my opinion, a viable option for investors seeking high current income. For many years the results of the Federal Reserve policies of pushing down rates has kept corporate bond rates unreasonably low for the risk people were taking. Now with investment grade issues paying in the 6% region, they may be a good fit for your portfolio and may outperform stocks over the next 5 years or more.
While many people have heard of the word "annuity," sometimes people have heard the wrong things. There are many types of annuities for various purposes. For our purpose here, a Fixed Interest Annuity (FIA) refers to a deposit with an insurance company that pays a fixed rate of interest, similar in concept to a CD (certificate of deposit) at a bank*. Generally the rates of interest are higher than CDs and will remain fixed for terms of between 2-10 years. One's entire deposit earns interest, which may be paid monthly or reinvested. The interest is sheltered from taxation until withdrawn. While nothing is deducted upon deposit, most annuities will charge a penalty if more than an allowed amount (often 10%) is withdrawn prior to maturity. Therefore, it is important to assess liquidity needs prior to depositing any funds. Annuities are considered extremely safe and are guaranteed by the claims paying ability of the insurer.
*Annuities are not insured by the FDIC. Instead, individual states commonly use a "guarantee association"^ to provide additional assurance.
Most people are familiar with "common" stock ownership in companies. Common stock moves up or down with the prospects of the company and the general stock market. It has voting rights and may or may not pay a dividend. Preferred stock is different and is sometimes described as a cross between common stock and a bond. Companies often issue both common and preferred stock to raise funds for various corporate purposes. Preferred stock usually pays a high dividend rate compared to its common stock counterpart. It has more risk than bonds and there will be some fluctuation but, historically, it is far less volatile than its common stock cousin. Preferred stock generally won't increase in value significantly as is possible with common stock. The reason to own preferred stocks is for income not for growth. Buying preferred stock usually requires a different approach than purchasing common stock where "market orders" can be often be used.
Business Development Companies (BDCs), Equity Real Estate Investment Trusts (E-REITs), Mortgage REITs (M-REITs) and Master Limited Partnerships (MLPs) are more focused on generating income for shareholders than growth in the stock price. They may be companies listed on the stock exchanges or may not trade and are owned privately. Investors buy shares of the companies and receive their share of any income generated by the company in the form of a dividend declared by the board of directors.
BDCs are lenders to (mostly) private companies, which comprise the bulk of companies in the USA. Many BDCs focus on the "senior secured" area of lending in order to reduce risks.
E-REITs may own multi-family apartments, storage facilities, industrial warehouses, data centers, hospitals or other health care facilities, large single store buildings (think Costco or Walmart), or other real estate with the goal to generate cash flow for investors. Generally a REIT is not an operator of the business but leases the property to the business which doesn't want to own the property so as to be able to invest more into their operations.
M-REITs are typically lenders to commercial real estate (mortgages) or own servicing rights to mortgages.
MLPs typically own gas or oil pipelines and energy companies pay for the rights to use their pipelines to transport their products.
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