Digging for gold in the Dividend Hills? Frustrated at the lack of safe, high-yield opportunities? Don't be -- they're out there. They just go by names that may sound unfamiliar and therefore give you pause. However, if you really take the time to examine them, you'll find they aren't so scary after all.
The first arena is my favorite -- the great unsung heroes of the fixed income sector known as Preferred Stocks. These stock-bond hybrids give you the stability of a bond while allowing you the flexibility to trade it like a stock. A Preferred Stock usually trades around its initial offering price, moving a few percentage points around it depending on the underlying health of the company that issued it. Thanks to the Fed, which announced that rates will be kept at all-time lows for quite some time, bonds have nowhere near the yields necessary to compete with Preferreds. My favorite in this space is Ashford Hospitality Trust Series E (AHT) -- its symbol varies by broker -- that offers a 9% annual dividend. Ashford has maintained significant liquidity for many years, even through the financial crisis. If you want diversification, go with the SPDR Wells Fargo Preferred Stock ETF (PSK). It offers a great yield of 7.06%. Top holdings include preferred stock issued by Barclays PLC (BCS), HSBC Holdings (HBC), Wells Fargo (WFC), and AT&T (T). Financials often have extensive preferred stock classes available. What I love about these holdings is that companies like Wells Fargo, which has well over a trillion dollars in assets, is a solid bank despite the financial crisis. AT&T is obviously not going out of business anytime soon. With preferred stock, we aren't concerned with growth (AT&T's is anemic), but with a solid balance sheet (AT&T's generates around $15 billion in free cash flow annually).
Ever heard of a closed-end fund? It represents an interest in a portfolio of securities focusing on a specific sector, actively managed by an investment adviser. The price will fluctuate based on both market forces like a regular stock, and the underlying values of securities held by the fund. So it's a stock-mutual fund hybrid. It also has a fixed number of shares. These allow you to invest in areas that mutual funds and ETFs just haven't gotten around to dealing with. I am particularly fond of The Blackrock Resources and Commodities Strategy Trust (BCX), which invests in commodity or natural resource stocks and also uses derivatives with exposure to commodity or natural resources companies. The idea of the derivatives is to try and outperform the commodity index benchmark. I've hunted everywhere for something like this, and I only found mutual funds that cost an arm and a leg or have some crazy minimum investment. It pays out 9.75% annually.
You can also thank the Fed for giving mREITs a longer life span. These mortgage-based investments are particularly lucrative if the mortgages they invest in are 1) backed by the federal government (called "agency REITs") and 2) interest rates stay low. They make their money off the arbitrage between the rates at which they can borrow money to purchase these investments, and the long-term rates of the mortgages they buy. My choice here is American Capital Agency (NASDAQ: AGNC) which currently yields 19.3% and as far as I can see, is safe for at least the next two years.
I like all of these opportunities because they are about as close as investors can get to the kind of deals one might find in the exclusive world of private equity. While some small investments are available in the world of private capital, the only other outlet is to look for public companies that play in the same space of alternative investments.