Interest rates are set to rise. Income investors should be concerned.
That’s the party line that has been repeated for the past six months. It’s one I have yet to buy into. As I point out in yesterday’s Income & Prosperity, interest rates haven’t been rising. Indeed, for most of 2014, interest rates have trended lower.
Nevertheless, Wall Street has rushed to fill the market with “rising rate” investments. These investments – funds really – are for the most part a collection of fixed-income securities designed to preserve principal should interest rates rise.
The meantime is a problem, though: These investments pay very little immediate income. A few even pay less than a one-year certificate of deposit (CD). If principal preservation is your overriding concern, then a CD or a short-term Treasury is the better way to go. Just don’t expect a decent payout.
I still see benefits to venturing out on the risk curve. Equity investments that pay dependable income and higher yield are attractive. If principal preservation is a concern, a few are even low-volatility. (Of course, nothing is guaranteed.)
Many business development companies (BDC) are bountiful income payers. These companies raise money in the debt and equity markets and then lend to small and medium-sized businesses. This simple business model leads to a diversified, reliable income portfolio.
High-Yield Dividend Stock #1
Prospect Capital Corp. (NASDAQ: PSEC) is my BDC of choice. It pays a monthly dividend at the rate of $0.11 a share. The dividend yields 12.2% based on Prospect’s prevailing share price.
Prospect continually raises its monthly payout a fraction of a cent every month. These increases aren’t spectacular but they accumulate over time. For investors seeking high current yield, Prospect is tough to beat.
Preferred stocks are tough to beat as well. There aren’t a lot of them, and those that exist are thinly traded. But preferred stocks can be a rich source of income. Many pay dividends that yield 6% or higher. Preferred stocks can yield two-to-three times the issuing company’s common shares. The preferred stock is safer to boot; it has a higher claim on the issuing company’s income and assets.
High-Yield Dividend Stock #2
Because many preferred stocks are thinly traded, a fund is the way to go. In the fund space, I like the Nuveen Quality Preferred Income Fund II (NYSE: JPS), which invests at least 80% of its assets in preferred securities. Nuveen also uses low-cost debt – about 28% of the fund – to goose income.
By leveraging its preferred-stock portfolio, Nuveen can pay $0.055 a share per month, or $0.66 annually, which generates a 7.5% yield. Here’s another consideration: Nuveen shares are on sale, trading at a 10% discount to their net asset value.
High-Yield Dividend Stock #3
Real estate is always a go-to income investment. Gladstone Commercial Corp. (NASDAQ: GOOD) is top of the pops. It’s a smaller commercial real estate investment trust (REIT) that’s overlooked by many investors. They should pay more attention: Gladstone owns a quality portfolio of commercial properties diversified by both use and geography.
Gladstone also pays monthly dividends, at the rate of $0.125 a share. This dividend has never been lowered, but has been increased three times in the past 10 years. Investors can capture annual income that generates an 8.6% yield based on Gladstone’s market price.
Admittedly, these three income investments are riskier than short-term Treasury notes and CDs. Then again, investors are compensated for the risk with a generous income stream. In fact, they can realize income up to 10 times greater than what’s offered on the safe investments.
Organize Your Dividends With One Step
Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out – and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12 month dividend stream to ensure income all year long. Click here to see the full details of the Dividend Calendar…