How to Boost Income Without Too Much Risk

The Federal Reserve last week pledged to keep interest rates low until the jobs picture improves massively.

Sounds great, right? But not for investors searching for significant income. The Fed's decision to stay on its low-interest course means safe investments like government bonds, money-market funds and certificates of deposit will continue paying peanuts.

So, how do you do better? Look into some lesser known, but sophisticated, investment vehicles. We found four types of investments, most of which have nice 4%-plus payouts—without a lot of risk.

One big caveat: If in a year or two the Fed starts raising interest rates, you can expect the value of these to go down.

1 Master Limited Partnerships - Think energy. The U.S. is in the midst of a giant home-grown energy boom. The land of big cars and central air conditioning is even on track to becoming a net energy exporter.

MLPs—which tend to focus on pipelines, other means of oil and gas distribution or other parts of the energy industry's infrastructure—are a way for ordinary investors to grab a piece of the boom, along with some very attractive dividends.

The partnerships are traded on Nasdaq and the New York Stock Exchange. You can buy and sell them like stocks.

"There are many MLPs where it doesn't matter what the price of oil or gas is because they [are] simply paid a toll to transport the energy," says David Dewitt of Dewitt Capital Management in Wayne, Pa. Many MLPs yield as much as 5% (payouts are called "distributions").

Because MLPs are partnerships, the company doesn't pay corporate taxes. But you do as part of your ordinary income. Overall it means Uncle Sam gets less money, but the record keeping can be burdensome. Average investors may find the best way to hold an MLP is in a tax-deferred IRA or 401(k) account.

2 REITs - Another business with the wind at its back is real estate, and depending on how you invest it can be tax-advantageous. The apartment market is starting to heat up and builders are taking notice.
Construction of multi-unit homes, or apartment blocks, surged 35% from June through October, according to the latest data from the Census Bureau.

"There are a lot of young adults living with their parents and the parents are getting tired," says Jeff Saut, chief investment strategist at Raymond James in Tampa.

Helping that situation is an improving jobs market with unemployment now less than 8%. As those young adults move into their own places, rents should start to rise.

If you don't want to be a landlord yourself, the best way to invest in the apartment boom is through real-estate investment trusts. They usually invest in hundreds of properties. Like MLPs, REITs themselves don't pay taxes on their earnings as long as they distribute at least 90% of the profits to investors. Instead you pay the taxes.

3 Leveraged Loans - Jack Ablin, investment officer at financial services firm BMO in Chicago, thinks buying portfolios of bank loans makes sense. Bank loans made to businesses and consumers are bundled up and sold to investors who then receive the interest and principal payments from the borrowers.

Mr. Ablin says such arrangements used to be mainstays of hedge-fund managers. Hedge funds found them a convenient and stable place to park cash between deals. Funds would often borrow to buy the loans—increasing risk while enhancing yields.

4 Preferred Stock - For many retirees, the stock-bond hybrid known as preferred stock can provide steady and safe income.

Similar to bonds, preferred stocks have regular fixed payouts—they're dividends, as with common stocks. But because preferred stocks are technically equity, they are considered riskier than bonds. For you that means higher yields.

"We're always looking to maximize income for our clients so we love preferreds," says Margaret McDowell, principal at Arbor Wealth Management in Miramar Beach, Fla.

Source:  Simon Constable, Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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