Earn 8% or More

From tankers to pipelines to real estate stocks, we've uncovered the investments with the best yields.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, July 2008

Some REITs in out-of-favor real estate sectors also pay well. Shares of First Industrial Realty trust (FR), a national developer and operator of warehouses and light industrial buildings, more than doubled between November 2002 and November 2006 but have since fallen 33%, to $30, over concerns about flat rents and the firm's high debt. The stock trades below First Industrial's net asset value per share and pays 10%, one of the highest yields among long-established REITs. There is still ample cash flow to maintain dividends.

Pipelines

Here's a way to get yields of 6% or more from oil and natural gas (and maybe some growth, too) without having to worry about which way energy prices are headed. Pipeline operators, organized mainly as master limited partnerships, are reliable dividend payers that offer a bonus of regular payout increases.

Pipeline operators charge a regulated toll to move commodities from one point to another. Unlike the old phone and electric monopolies, though, pipelines face competition. A lot of new projects are in the works (maybe too many) to move natural gas from Texas, western states and Canada to hub terminals in or near major cities and to connect with coastal refineries and liquefied-natural-gas terminals. Low interest rates help this industry because it takes billions of dollars to build and maintain these networks.

Traditionally, pipeline MLPs yield about two percentage points more than Treasury bonds and also offer appreciation potential. But it's the cash payouts that determine the share prices. Treasury yields are sure to rise, so it's important to choose pipelines with a long history of substantial dividend increases. Shares of pipeline MLPs that consistently boost payouts should hold up well in a rising-interest-rate environment (otherwise, share prices are likely to fall to maintain their normal yield advantage over Treasuries).

Solid, established operators include Enterprise Products Partners (EPD), Kinder Morgan Energy (KMP), Magellan Midstream Partners (MMP), and Plains All American Pipeline (PAA). All have long histories of boosting their payouts and all currently yield 6% to 8%. A tip: Don't own MLP shares inside an IRA. There are potentially nasty tax consequences.

Emerging-market bonds

The days of double-digit yields and steady price appreciation from bonds issued in developing nations are gone. As ratings agencies have upgraded emerging economies and investors have poured money into their bonds, yields have shrunk dramatically. But bonds from Brazil, China, India, Indonesia, Mexico and Russia, to name a few, are still sources of superior income and provide diversification benefits to boot. And the countries are far stronger than they were in the 1980s and '90s, substantially reducing the possibility of default. In a sign of the times, Standard & Poor's recently upgraded Brazil's debt to investment-grade status.

Rising commodity prices, a headache for most Americans, have been a blessing for many emerging nations. For instance, Brazil, Mexico, Russia and Venezuela are big oil producers. A crash in oil prices would hurt their economies and would likely put pressure on their bonds.

For most people, funds make the most sense for investing in these esoteric bonds. Expenses tend to be high in this category, reducing yields, but longtime standby Fidelity New Markets Income (FNMIX) charges a reasonable 0.88% a year and pays 5.9%. Despite a horrendous 22% loss in 1998, the fund has returned 11% annualized over the past ten years. PIMCO Emerging Markets Bond D (PEMDX) is nearly as good a choice, although its expenses (1.25% annually) are higher and the yield (5.2%) is a little lower. The fund's older Class A shares (PAEMX), which levy a sales charge, have returned 13% annualized over the past decade.

Munis: rich returns from safe bonds

Tax-free bonds are no longer terrific deals. Now, they're merely good deals. The transformation culminated in early May, when the average yield of ten-year tax-exempt bonds, at 3.8%, reached parity with the yield of ten-year Treasury notes. (For a few months before, munis had actually yielded more than Treasuries, a rare state of affairs.) But municipals remain attractive, especially if you are in a high federal tax bracket and also live in a high-tax state, such as New York or California.

Consider, for example, New York City residents in the 35% federal bracket. They can buy bonds issued by the Port Authority of New York and New Jersey that yield 5.0% to a possible call (or early redemption) in November 2026. For these well-heeled New Yorkers, that's the equivalent of an 8.6% yield from a taxable bond. Port Authority bonds are rated AAÐ by S&P, so they are quite safe.

In fact, defaults among muni-bond issuers are rare, so you should give strong consideration to building your own portfolio of tax-free IOUs. After all, why should you pay a mutual fund up to 1% a year (sometimes even more) to invest in bonds that will mostly yield 4% or so? If you do buy your own bonds, you should build a laddered portfolio -- that is, one in which bonds come due at regular intervals. For safety, stick with general obligation bonds of states, counties and cities, or essential-service revenue bonds, which are used to construct and operate highways and water and sewage systems.

If you still prefer the convenience of a mutual fund, try Fidelity Intermediate Municipal Income (FLTMX), a member of the Kiplinger 25. It yields 3.4%.

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