Markets

Where to Find the Best Yields

From tankers to trusts, a host of ideas for generating great current returns.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, August 2006

What's reassuring about the quest for high yield is that something always works. Rising inflation and rising interest rates threaten to clip the value of your Treasury bonds? Don't sweat it. Plenty of investments yield 8% -- far more than the current 5% yield on Treasuries -- and many of them will actually benefit from a peppy economy.

Take Allied Capital, which chief executive William Walton calls a "publicly traded private-equity company" (try saying that six times fast). He means that Allied lends money to or takes ownership stakes in midsize, privately owned U.S. businesses (or does both). Allied backs companies -- 126 at present -- that do everything from make mousetraps to run muffler franchises.

For its efforts, Allied is well paid; it's collecting 12%, on average, on its portfolio of loans. Interest charges that high suggest weak borrowers. But the economy is strong, so only 2% of the loans are past due. Allied (symbol ALD) trades as a stock but is structured as a "regulated investment company," so it must pass nearly all of its net income to shareholders. The annual distribution of $2.40 a share -- half taxed as capital gains and half as ordinary income -- yields 8% at Allied's recent share price of $30.

Want more yield? You may find Thornburg Mortgage (TMA) to your liking. As a real estate investment trust, it, too, trades like a stock. But Thornburg owns no hotels, offices or other properties. Instead, it makes jumbo adjustable-rate home mortgages (average size: $750,000) to wealthy customers with impeccable credit histories. Thornburg keeps the loans as investments and also invests in mortgage-backed securities. In less capable hands, this mixture could be toxic; but the people in charge of Thornburg know how to cope with rising interest rates. Because it's a REIT, it hands out 90% or more of its net income as dividends. At $27 and with a dividend of $2.72 a share, Thornburg yields 10%. The shares swoon from time to time, but Thornburg has returned 13% annualized over the past three years and 26% over the past five.

With results like that, who needs Treasuries anyway? Not Ed Treis. The retired banker from Village of Chenequa, Wis., says 95% of his publicly traded holdings are in Allied Capital and two other types of lucrative income producers -- REITs and specialized oil-and-gas securities. Treis, 58, first bought Allied stock eight years ago "in the teens" to capture the dividends and because he likes the diversified nature of the firms in Allied's basket.

REITs and energy royalty trusts are repeat visitors to Kiplinger's annual yieldfest. Although we generally identify investments with current returns of 8% or better, we're willing to accept a lower yield in exchange for less risk. Here are our picks, in declining order of yield.

Cruise with tankers

The maritime industry is riding a wave of global prosperity, but until lately, this meant zilch to income investors. The few publicly traded fleet companies paid small or no dividends. Then about two years ago, a few new fleets with a different business plan came into being. Instead of tying their fates to short-term, or "spot," freight rates, they contracted for up to ten years with big energy, metals and grain-trading companies. The new-wave fleets promised to pay out to shareholders virtually all the cash that was left after they met expenses.

So far, these yield-oriented tanker stocks have delivered the goods, not just to customers but to investors as well. But share prices remain low and yields generous. Four to consider are Arlington Tankers (ATB, $22), Double Hull Tankers (DHT, $13) and Genco Shipping and Trading (GSTL, $17). It's best to buy these stocks as a package because anything that knocks a ship out of commission can jeopardize the dividend.

1 |
• 2
|
• 3
|
• 4
• NEXT >

• Print
• Comments
• Email
• RSS