Easy monetary policies have left income investors in a lurch. But exchange-traded funds (ETFs), REITs, master limited partnerships (MLPs), and preferred stocks can help fill the gap.
These are tough times for income investors thanks to easy monetary policy and U.S. interest rates near zero. Even when rates finally rise, the climb is likely to be slow. That means income-producing investments outside of dividend-paying stocks and bonds might be worth a look.
REITs trade like stock on an exchange, but invest directly in real estate through properties or mortgages. This makes REITs susceptible to real estate market swings and interest rate risk—we’re talking the ups and downs. But investors may find attractive yields in this category because the nature of REITs allows them to pass along most income to shareholders. In addition to buying individual REIT shares, select exchange-traded funds (ETFs) are focused on REITs.
MLPs are limited partnerships that are traded on exchanges like stock. They carry unique tax consequences, and it’s always a good idea to check with your tax professional before investing in these securities.
MLPs are required to derive most of their cash flows from real estate, natural resources, or commodities. As a result, many MLPs are associated with oil and gas in one form or another, mostly through storing and moving product. This has been a boon for many income-starved investors over the last year as oil prices crashed, which pumped up the yields on many MLPs.
Preferred stocks are stock through and through, but some characteristics make them more bond-like. They’re typically more stable in price than common stocks and, like a bond, they pay investors regular income. Because of that bond similarity, however, preferred stocks are at risk from rising interest rates.
Preferred stocks can be purchased on an individual basis, but investors need to be careful to research individual issues and their assorted unique characteristics. Your broker can be a great resource.
REITs, MLPs, and preferred stocks are packed with unique risks. These income investments may complement a portfolio of dividend-paying stocks and bonds. In some cases, a small allocation to REITs, MLPs, and preferred stocks could help to increase diversification and maybe even boost the yield of a portfolio. You, and your broker, need to determine if this mix is for you.