It’s no secret that in today’s low interest rate environment, retirees are having all kinds of trouble finding ways to generate enough income to meet their expense needs. It used to be that you could stick money into a government or a highly rated corporate bond and get a respectable return. Today, those same vehicles will generate virtually nothing. To get 3% on a corporate bond means that you will need to either invest for a very long term or take a lot more risk in the bond you choose.
One solution that appears in what seems to be 3 out of 4 retirement articles is to invest in dividend stocks, or to be more specific, in stocks that have long track records of raising their dividends. Examples of these companies are Con Ed (ED) or Johnson & Johnson (JNJ). They pay over 3.5% dividend yields and if they keep raising their dividend you get even more income. I have written about this strategy many times in this column and for certain investors, it’s a good approach.
The downside with this is that there is potential for substantial capital risk. After all, no matter how juicy the dividend, we are still talking about stocks and it goes without saying that even the ‘best’ stocks can lose investors a ton of money. For those investors who can tolerate violent swings in their principal, dividend growth stocks may be appropriate. But for investors who can’t afford to risk some principal, a portfolio that is 100% invested in stocks of any kind isn’t relevant. The question then is where to go to get income?
Retirement investors have to get a bit creative to achieve the yield that they need, and as such should look at a variety of options that are still available that can help them get enhanced income. I have written about preferred stock as well as high yield and emerging market bonds. These have both advantages and disadvantages and certainly can be part of a diversified portfolio, but probably shouldn’t be considered as ‘the’ solution.
One asset class that has started to gain attention for both the right and wrong reasons are Non-Traded REITs (NTRs). NTRs are investments in real estate investment trusts that don’t trade on any stock exchange. Unlike publicly traded real estate, NTRs don’t come with the same fluctuation in principal that you find in other REITs. NTRs have become popular because of the high level of income that they distribute, usually in the 7-8% range. Many investors want exposure to a beaten down U.S. real estate sector like NTRs because not only do they get a well diversified real estate portfolio with a big yield, but they also get potential for capital appreciation in the real estate held, and there are built in 2% annual rent increases, which gets passed through (mostly) to investors as well. NTRs are required to either liquidate or list their shares on an exchange within a specified period, usually at least seven years.
NTRs may sound too good to be true. After all what can be bad about getting 7%, potential capital appreciation and no fluctuation in the share price? There are critics to NTRs who like to point out the less rosy side of the asset class. They point to very high fees paid by investors that ultimately bring down returns and the lack of transparency in pricing these assets. Just because there is no fluctuation in the share price doesn’t mean that the actual value of the instrument hasn’t moved. Rather, it’s just that no one knows how to price it. NTRs are required to update their net asset value every year and a half after their offering, and if you look at their own reports to the S.E.C. you will find that the share prices have dropped well below their initial price.
Michael McTiernan, a lawyer for the S.E.C. told the NY Times:
One common sales tactic we object to is the suggestion that they are eliminating volatility simply because they don’t tell you what the value is. It’s not that it’s not volatile. It’s just that you don’t know.
Firms like America Realty Capital (ARCP) and others have taken these criticisms to heart and are launching products with daily pricing and much lower fees. NTRs are not for everyone but investors in search of yield should research them as they may provide a solution for today’s non-existent interest rates.