The Fed has finally started to back off a bit from its five-year campaign to drive down interest rates, but it’s hardly given up altogether yet, and with Chairwoman Yellen there’s always the chance it may ramp it bond-buying back up if the economy slows. Whatever, the damage to fixed income investors remains deep – bond yields are still a shadow of what they’re used to getting. Ten-year Treasuries are still paying well under 3 percent, and investment grade corporate yields are just whiskers above that inauspicious mark.
So what can a low- to moderate-risk investor do for better income? Buy junk? You don’t have to go there. I’ve got three better ideas, three tasty dividend-paying stocks that can boost your income without taking on too much risk.
One lets you play in a rarefied part of the market that’s otherwise limited to high net worth individuals: private equity. Business Development Companies are publicly traded firms that invest in fast-growing, small and mid-sized privately held businesses that retail investors can’t touch. Typically, BDCs make mezzanine loans that yield in the teens and often get warrants for a major equity pop if and when the companies make it big.
Investing in just one or two BDCs might be more risk than you feel comfortable with. But what if you could spread your risk by investing in a basket of all the major BDCs? You can with my first income stock pick for 2014: the UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS), which tracks all the Business Development Companies listed on the New York Stock Exchange. NASADQ-listed, this exchange-traded note yields an impressive 7.16 %, and because BDCs must pay out dividends in the same way that REITs do, you can count on this payout.
Speaking of REITS, my second top choice for 2014 is Preferred E Series shares of Ashford Hospitality Trust (AHT). Ashford is an extremely well-run hotel REIT, one of the very few that didn’t suspend its preferred dividends during the financial crisis. Along with the economy, demand for hotel rooms industry-wide has been growing at 1-2 percent year, but the kicker is that demand exceeds industry supply, so hotels have pricing power.
Because this is a preferred stock, there tends to be very little movement in its price, and it trades more like a bond. The Series E pays $2.25 in dividends annually which, at its recent price of $26.44, represents a current yield of about 8.5%.
My third recommendation is an old standby, AT&T (T), which remains the prototypicalstock that will pay you a solid dividend no matter what. AT&T generates $14-$16 billion in free cash flow every year, and pays out about $10 billion of it in dividends. It’s profitable, has manageable debt service, and remains in fine shape even if it isn’t a hot growth stock. Including dividends, it’s returned an average of 11.4% over the past three years. At its recent price of $33.18, T’s dividend yield was a handsome 5.6%.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]