Top 3 Safe, High-Yield Income Investments In 2021

Summary

• With bond yields at historical lows, it’s difficult for retired investors to find safe investments that still pay a good yield.
• However, 3 opportunities still exist: blue-chip REITs, preferred shares, and property-backed loans.
• We discuss the pros and cons of each option, and whether they fit into a balanced retirement portfolio.
• Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

Photo by AndreyPopov/iStock via Getty Images

As investors near retirement age, they are usually advised to move more of their money into income investments in an effort to de-risk their portfolio.

Retirees typically make less money than those in their prime working age, so the idea is that these income investments will literally help replace or supplement their income levels. While a young person with a good income can ride out a stock market crash, an older person may still need money coming in regularly to pay the bills since they aren’t working.

All in all, the advice seems to make a lot of sense.

But the issue is that retirees often get greedy and end up investing in risky MLPs (AMLP), mortgage REITs (REM), leveraged CEFs, and other similar high-yielding vehicles that cannot sustain their income and end up producing disappointing returns over time.

So where does one turn for safe, reliable income?

The good news is that some good options do still exist. Below we reveal 3 of our favorite income investments that we’re still buying in 2021:

#1. Blue-Chip REITs

Now, I know what you’re going to say. “REITs can still be risky.” And, to an extent, it’s true. Many REITs (VNQ) have excess debt or are operating in lackluster sectors. These are REITs like GEO Group (GEO), which owns private prisons, or Wereldhave (OTCPK:WRDEF), which is overleveraged.

By investing in blue-chip REITs, however, you can sidestep this risk quite easily. Blue-Chip REITs have a number of advantages:

• They have healthy amounts of debt and strong balance sheets.
• They own essential, stable properties with longstanding leases & tenants.
• They’ve paid and grown their dividend consistently over many years.

A blue-chip REIT that might suit retirees would be something like Realty Income (O). It checks all the blue-chip requirements:

• A- rated balance sheet.
• High-quality net lease properties.
• Over 20+ years of paying and raising the dividend:

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O still hasn’t recovered to the price it was at before the March 2020 COVID sell-off. That means you can still pick up a stable, defensive business with good growth prospects that also pays out a nice 4.2% yield.

#2. Preferred Stocks

We mentioned earlier that income investors and retirees move out of speculative stocks in order to de-risk their portfolios. One thing they’re hoping to reduce is volatility. However, many investors skip straight over preferred shares and go straight to investing in bonds.

Preferred shares can be advantageous for retirees for a few reasons though:

• They pay regular dividends
• They often have higher yields than stocks
• They’re generally less volatile than stocks

Today, most preferred shares are overpriced, but a few opportunities remain.

We like Farmland Partners Series B Preferred Shares (FPI.PB) because of two key reasons:

#1 - Participation feature: First of all, it has a participation feature that allows it to participate in the appreciation of its farmland portfolio. They call it the "Farmland Value Accretion" or FVA in short, and it is essentially a profit-sharing mechanism that entitles the preferred shareholders to 50% of the appreciation in the company-owned farmland as of June 30, 2017.

At the redemption of the preferred shares, investors will receive $25 + FVA (currently $25.80), and given that farmland is an asset with rapid appreciation potential, particularly if inflation accelerates, the par value could grow significantly over the coming years.

#2 - Yield bump in 2024: Secondly, if the shares are not called back by October 2024, the coupon will jump to 10%.

Essentially, it means that the preferred shares are highly likely to be called back in 2024, which makes them similar to owning 3-year bonds with a clear maturity date and inflation protection

Source: Pixnio

And the best part? FPI.PB pays out a nearly 6% yield that you can count on. The company generates steady cash flow from farmland, which is recession-proof, and therefore, the risk of a dividend suspension is very low.

#3. Property-Backed Loans

Finally, if you don’t want to own stocks or preferred shares, private property loans can be a great alternative. You can find these on several different crowdfunding platforms.

These loans have a few distinct advantages:

• They yield up to 8-12%
• They have built-in protection, with 60+% loan-to-values.
• They have short terms of 6-12 months.

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However, you have to be aware that these loans can be very illiquid. Also, they aren’t 100% risk-free. The occasional foreclosure or late payment isn’t uncommon. But private property-backed loans are still safer than an equity investment in property because equity investors take losses before any loss is passed on to the lender.

We average a 10% yield with our own property-backed loans on a platform called Groundfloor. Note however that overall, property-backed loans only make up a small portion of our retirement portfolio. While they shouldn’t necessarily be a huge position, they can help boost yield and lower volatility, which are big bonuses for retirees and income investors.

A Portfolio That Suits Your Goals

The take-home message here is this: no matter what, you must build a portfolio in line with your own goals and current lifestyle. If you’re retired and need to supplement your income, your portfolio will probably look much different from that of a younger investor who wants to speculate and take on more risk.

For retirees, consistent income is the priority. Some of the best ways to achieve this are by investing in:

• Blue-chip REITs
• Preferred Shares
• Property-Backed Loans

These investment vehicles can offer sizable yields while carrying low risk and a high margin of safety. That’s why they make up a large portion of the High Yield Investor portfolio.

While no investment is immune to risk or loss, these are among the safest, highest-yielding income investments that you can find on the market.

Analyst’s Disclosure: I am/we are long O; FPI.PB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.