Reaching For Yield?

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It's hard to find good yield these days.  Oh, there are plenty of high yielding opportunities (see many of the REIT's for returns above 13%).  But we all know returns that high don't come without high risk.  So investors needing income have a dilemma: should they reach for yield and take the risks or play it safe and take the paltry 1% or lower returns that come from CD's and treasuries?

One strategy is to take both, sort of a barbell effect.  That is, buy CD's and treasuries but also buy some high yielding stocks and bonds.  Again, the REIT's give plenty of risk and return.  But there are also high yield bond funds that return decent payouts.  For a list of most of them, see Morningstar's Favorite High Yield Bond Funds (http://news.morningstar.com/fundReturns/FundReturns.html?category=%24FOCA%24HY).  Yields range from 5% to 8%.  Not bad when you consider 1 year treasuries offer .13%. 

The "barbell" approach is to balance the amount of money you put into each category.  Let's say you have $30,000 to invest and want to maximize income but keep risks somewhat manageable.  The barbell approach has three types of investments, the beginning, middle and end.  The beginning of the barbell would be the CD's and treasuries.   Put $10,000 in those with an average return of .50.  (One year CD rates vary between .15% and 1.15% depending on the size of the CD and the institution offering it.)

Now you take $10,000 and buy four different high yield bond funds, the middle of the barbell.  The average return should be about 6%.  You can look into these funds at the site from Morningstar given above.

The last, and furthest out on the risk curve, the final part of the barbell, are the REIT's.  With your final $10,000, buy 4 different REIT's, limiting your exposure to any one to $2500.  Furthermore, to give some level of comfort, buy REIT's that represent various classes of real estate, such as single family mortgages CIM:14.10%, ARR:18.8%, TWO:16.1% , NLY:13.3% are only a few of the many (all of which I own, in small amounts)). 

Furthermore, if you'd like to mitigate your risk in the single family mortgage REIT's you can buy ones that only have agency mortgages, agencies like Fannie Mae, Freddie Mac, and Ginnie Mae.  All REIT's list their holdings so you can determine what they own..

Another class for this group would be apartment REIT's.  There are 14 of them operating in the U.S.  Some of the names are BRE Properties (BRE: 2.9%), Essex Property Trust (ESS: 2.8%), Avalon Bay (AVB:2.6%).  As evident from the yields, investors find these rather easy to buy since the cash flows are increasing as more apartments fill.  While the yield is lower than single family REIT"s, it's much better than CD's and treasuries. 

One more class is office buildings.  Some of those are Boston Properties (BXP:2.0%), Brandywine Realty (BDN:5.4%), Mack-Cali Realty (CLI:6.1%), and SLGreen Realty (SLG:1.3%).  For a complete list, see: http://www.dividenddetective.com/reit_directory_office.htm  Again, these yields don't approach the single family mortgage REIT returns, but the risk is much less as there are cash flows from business tenants, some of them major corporations.

One other group is shopping center REIT's.  For most of these, see the Yahoo!Finance site: http://finance.yahoo.com/quotes/ADC%2bAKR%2bALX%2bBFS%2bDDR%2bEQY%2bFRT%2bKIM%2bOLP%2bREG%2bUBP%2bWRI/view/v1

Some names are: Agree Realty (ADC: 6.3%), Saul Centers, Inc. (BFS:4.0%), Equity One, Inc. (EQY:4.5%), Kimco Realty Corp. (KIM:4.0%), and One Liberty Properties, Inc. (OLP:7.0%).  There are several more at the above site to investigate.

The purpose here is not to recommend these specific stocks, but rather to think about finding yield without taking inordinate risk.  While you could buy only the highest yielding stocks, you'd find that sleep would be much more difficult, as would conserving your wealth.  There's a reason for the high yields, and it isn't good.

But if you take the above group of possibilities and look at the averages for these groups, you could combine them in such as way as to have a decent return.  If $10,000 in the safest instruments brought .50%, then that would provide $50 of annual income.   The next group, high yield bond funds, might return 6% for a return of $600 a year.  The next, and riskiest $10,000 being invested in REIT's might have an average return of 10%.  That would provide $1000 a year.   When totaled, these three groups give an annual pay out of $1650 on a $30,000 investment or 5.5%. (For more investing ideas, see our site: www.theonlineinvestor.com)

That end of the barbell is scary for some investors, as it should be.  There's lots of risk there.  But careful scrutiny of each REIT, particularly the singe family mortage ones, will give some comfort.  It also helps to have an opinion on the housing market.  The more optimistic you are about it, the more comfortable you'll be in owning these.

This is only one strategy for getting more yield without taking inordinate risk.  There is still plenty of it, but if investors diversify their asset classes and/or use mutual funds for professional management and diversification, they can cut their risks and increase their returns.

- Ted Allrich
February 7, 2012



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Mutual Funds , Stocks


Ted Allrich

Ted Allrich

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