To get double-digit yields today, you’ll have to invest in the kinds of publicly traded stocks that rarely come up in cocktail-party conversation: mortgage REITs and business development companies. Both borrow at low short-term interest rates and lend at higher long-term rates, so their success depends on the Federal Reserve keeping short-term rates low. If short-term rates start to climb, shares of both mortgage REITs and BDCs are likely to tumble.
Analyst Merrill Ross, of Wunderlich Securities, in Memphis, Tenn., recommends Invesco Mortgage Capital (IVR, $22, 12.0%). Run by an affiliate of the Invesco mutual fund group, the REIT owns residential and commercial mortgages. About 70% of its investments are “agency” loans, those backed by the likes of the Government National Mortgage Association. A relatively high 17% of the portfolio is in higher-yielding but riskier non-agency loans, though rising property values mitigate some of the danger.
Jason Stewart, head of research at Compass Point Investments, a Washington, D.C., firm, likes AG Mortgage Investment Trust (MITT, $25, 13.0%), in part because 18% of its portfolio’s assets are in non-agency loans. Stewart is also high on AG’s execs; they’re affiliated with hedge fund operator Angelo, Gordon & Co., which has a superior record. For more diversification, pick between two ETFs that specialize in this group: iShares Mortgage REIT Capped ETF (REM, 11.1%) and Market Vectors Mortgage REIT Income ETF (MORT, 10.2%).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Business development companies may be esoteric, but they are hardly undiscovered. The stocks have been sizzling of late, so it has become tougher to find attractively priced high yielders, says analyst Greg Mason, of Keefe, Bruyette & Woods. One BDC that does pass muster with Mason is KCAP Financial (KCAP, $10, 11.0%), which specializes in some of the riskier pockets of the lending market. The New York City firm’s loan portfolio is filled with high-risk, high-return loans. But Mason says KCAP’s executives are highly skilled and will likely minimize defaults.
Some leveraged closed-end muni bond funds also scale to 10%-plus heights. Like the block of BlackRock funds mentioned earlier, these four Invesco funds—Advantage Municipal Income Trust II (VKI, $13, 6.6%), Municipal Opportunity Trust (VMO, $15, 6.6%), Municipal Trust (VKQ, $14, 6.4%) and Trust for Investment Grade Municipals (VGM, $15, 6.6%)—employ similar strategies, only they do so with tax-free debt. The funds invest mainly in long-term high-quality bonds that finance such things as airports and hospitals. For investors in the top 39.6% bracket, a tax-free yield of 6.6% is equivalent to 10.9% from a taxable investment. All four funds recently traded at small discounts to NAV.
If you’re willing to go for broke to earn the best yields, consider Northern Tier Energy (NTI, $27, 20.6%). The Ridgefield, Conn.–based pipeline and refining firm has made only two distributions since going public last year, so the yield is based on what’s been paid so far. If Northern Tier’s profits keep rising, as analysts expect, it will continue to make rich distributions. But commodity prices are volatile, so profits, payouts and the share price could be, too.
-
October CPI Report Hits the Mark: What the Experts Are Saying About InflationCPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
-
CPI Report Points to Gradual Pace for Rate Cuts: What the Experts Are Saying
CPI Inflation surprised to the upside last month but the disinflation trend remains on track.
-
Strong September Jobs Report Puts Soft Landing in Sight: What the Experts Are SayingJobs Report A blowout reading on nonfarm payrolls takes another jumbo-sized cut to interest rates off the table.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
-
Will the Fed Cut Rates in September? Here's What Experts Predict
The race is already on to predict the trajectory of future reductions to borrowing costs.
