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Safe, Above-Average Income from your Investments Year after Year |
Published: March 3, 2006
Remember when the stock market went bust in the early 2000's and some
people lost the nest egg they had spent years building? Those years of
"irrational exuberance" followed by the dot-com bust are a
sobering reminder of just how volatile the market can be.
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If you're retired or depend on your investments to deliver a
significant percentage of your annual income, then you want to capture
the highest yields available to you. On the other hand, you also want
secure dividend payments you can count on. The catch is that high yield
and high safety often combine about as well as oil and water.
The main problem is that dividends don't come with a money-back
guarantee. Companies can cut their payouts or eliminate them altogether,
as they see fit. Think of General Motors (GM), which was yielding about
9% until it slashed its dividend in half a few weeks ago.
Bonds are safer, but it's hard to find a secure bond that also delivers
a great yield. The risk-free 10-year Treasury note, for instance, is now
yielding just 4.5%.
Finding high yield and high safety in one investment can be tough, but
it's certainly not impossible. In the search for both high yields and
high safety, the following asset classes are a good place to start .
. .
Bonds and Preferred Shares
If you're looking for income safety, then investment-grade bonds and
preferred shares are hard to beat. Government savings bonds are about as
safe as you can get, and high-quality preferred shares aren't far
behind.
Preferred shares are like a hybrid between stock and bond. They carry a
coupon rate like a bond, but they trade on a stock exchange. They're
called "preferred" because they receive higher priority than
common stock when it comes time for a company to make dividend payments.
Like bonds, preferred shares have a face value -- the price at which
they were issued. If the shares are redeemed or you hold them until they
mature, then you'll get back this amount at their maturity date (unless
the company goes bankrupt or liquidates).
Preferreds are safer than common stock, but not quite as safe as bonds.
If a company goes bankrupt, then bondholders are the first in line for
its assets, before preferred shareholders. That's why it's important to
check the issuing firm's credit rating. For example, General Motors'
preferred shares are rated junk, meaning there's a high possibility the
firm may default on its interest payments.
In recent weeks I've managed to uncover several high-yielding bonds and
preferred stocks that offer both safety and above-average income
potential, and I've profiled all of these investing ideas in my premium
income-oriented newsletter -- High-Yield
Investing.
Master Limited Partnerships
Another place you can turn for safer, high-yield stocks are securities
called master-limited partnerships, or MLPs. Like real estate investment
trusts, MLPs are required to distribute most of their taxable earnings
to shareholders, so they pay big dividends. As a group, their average
yield is better than +6.0%, according to the latest research from
Wachovia.
I like these stocks because they generate steady earnings and dividend
payouts from stable assets. Many MLPs process and ship gas through
pipelines. They make money by charging a fee based on the volume of gas
put through their pipelines. In that way, they may benefit from strong
demand for natural gas. In addition, many of these firms are also
protected to the downside by long-term contracts that guarantee them a
minimum rate of return.
For an in-depth look at some of my favorite individual MLPs, please
review the most recent issue of my premium newsletter -- High-Yield
Investing.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
