If Your Money Manager Says This… Run!
High quality corporate and government bonds were once considered the foundation of a good investment mix.
Getting that kind of advice today is pure baloney.
If you do, don’t walk… run out of your broker’s office as fast as you can.
When it comes to investing with a margin of safety and a higher yield today, the asset classes at the top of my list are quality, dividend-paying stocks and Master Limited Partnerships (MLPs).
First, high-quality stocks that pay solid, growing dividends should be the cornerstone of any investors portfolio. About half of the total return from stocks over the long run comes from dividend yields and the reinvestment of those dividends.
Plus, when volatility picks up high quality stocks tend to outperform the overall stock market.
Second, beside dividend-paying common stocks and American Depository Receipts ADRs, there’s another class of stocks that look attractive to me right now.
They are preferred stocks.
Preferred stocks are a middle ground for companies that want to raise money without selling bonds and increasing their debt load, or issuing more common stock, which dilutes earnings.
Instead they issue a hybrid security known as preferred stock. Many large financial firms, both in the U.S. and internationally, routinely issue preferred shares. Sometimes the preferred stock is also convertible into common shares.
Owning preferred stocks puts you higher in the pecking order of the corporate structure too. Preferred stocks also have a higher claim to a firm’s assets, earnings and dividends than common stockholders.
Typically, preferred stocks have a fixed dividend yield that is often much higher than the yield on the same company’s common stock. That means preferred stock tends to fluctuate less than common shares too when markets turn volatile.
There are many mutual funds and ETFs available that invest entirely, or mostly, in preferred stocks. Two that make my short list are the VanEck Vectors Preferred Securities ex-Financials ETF (PFXF) offering a fat 6.3% yield, and the PowerShares Preferred ETF (PGX), which yields 5.7%.
Third, another asset class that looks very attractively valued today are Master Limited Partnership (MLP) shares. MLPs are created by large energy companies who often spin off certain income-producing assets into a partnership structure.
These securities often pay generous dividend yields, in the range of 6% to 9%, and sometimes even higher. The dividends are backed by energy assets like oil and gas pipelines processing plants and storage facilities.
MLPs got hit hard during the sell-off in oil and gas prices a few years ago and still haven’t fully recovered yet.
Also, recent fears that regulators could change the tax rules for MLPs drove prices well below fair value. As such, today there are plenty of high-yielding bargains on sale in the MLP sector.
The best way to invest in MLPs for my money is through ETFs. That gives you instant diversification across dozens or even hundreds of ETFs, and several ETFs are structured to avoid the tax-reporting hassle of traditional MLPs.
Two of my favorite plays in this attractive, high-income sector are: Alerian MLP ETF (AMLP) offering a rich dividend yield of 8.3%, and the E-Tracs Alerian MLP Infrastructure ETN (MLPI), with a payout of 6.8%.
Bottom line: For safer, and more lucrative fixed income investments stick to options offering higher yields than today’s “dangerous” investment grade bonds.
Instead, look to preferred stocks and MLPs. They make the grade.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: Want to see the rest of my best fixed income fund solutions right now?
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