How To Earn Higher Income In Your Retirement Accounts

Includes: ED, EEP, EPR, HCP, KMP, LEG, NUE, T
by: Avi Morris

Times are tough for retirees and others planning for retirement when searching for high income. The Federal Reserve has a policy of low interest rates that will continue into 2015. At the same time, rising stock prices have made it more difficult to earn satisfactory levels of income from dividends because of declining yields.

The 10 year Treasury bond yields less than 2% while short term rates are almost nothing. Despite record low yields, there is virtually unlimited demand for Treasury securities from risk averse investors all over the world. Investment grade corporate bonds are common investments in retirement accounts. But their yields are only a little above Treasury rates, again because of heavy demand around the world.

Yields on high yield (junk) bonds are near a relatively low 8%, similar to the lowest rates in the past. But the yield spread over the 10 year Treasury bond is around 600 basis points, wider than the narrowest spreads in the past (450-500 basis points). Today's high yields on junk bonds are providing a fair additional reward for accepting a higher level of risk and these rates can persist for some time (as in the past).

A newer investment for retirement accounts is MLPs. They have an outstanding record of growth over the last 17 years (when many famous stocks faltered). The Alerian MLP Index grew at a compounded annual growth rate of 9%. But they are better known for high yields which have tax advantages in personal accounts. The yield on the MLP index is 6.2%. Kinder Morgan (NYSE:KMP) and Enbridge Energy (NYSE:EEP) deserve special mention for retirement accounts because they have companion corporations [(KMR) and (NYSE:EEQ) respectively] which are retirement account friendly. The corporations pay stock dividends based on the distributions paid on the units. Of course stock dividends add to company shares, not cash in the account. EEP and EEQ yields are around 7%, and KMP and KMR yields are around 6%.

The days of double digit yields on REITs (real estate investment trusts) are gone. REITs yield 3-4% and a few have higher yields. Many dividends were cut in the last recession, followed by increases during the recovery period. Two quality higher yielding REITs are: Entertainment Properties (NYSE:EPR) with a generous yield of 6.4% invests in movie multiplex theater complexes and leisure properties, and HCP Inc. (NYSE:HCP) invests in health related properties with a yield 4.3%.

High yields with growing dividends on stocks are getting more attention to boost income. Higher yields from Dividend Aristocrats, which have increased dividends annually for at least the last 25 years (HCP above just joined this elite group), are significant for growing income. During a very difficult recession in 2008 and 2009, dividends from Dividend Aristocrats were increased when many highly regarded companies ended their streaks. As a bonus, consistent dividend growth is a significant ingredient for capital gains. Besides HCP, Leggitt-Platt (NYSE:LEG) deserves attention because of its 4.6% yield. LEG makes components for seats and household furniture. It has been actively buying treasury shares in recent years and has raised the dividends for 41 consecutive years.

Three other high yield Dividend Aristocrats are AT&T (NYSE:T), Con ED (NYSE:ED) and Nucor (NYSE:NUE). Everybody in America knows AT&T and ED is the utility for the New York metro area. Both have been raising dividends with modest amounts, but 4% yields with growing dividends can be of interest for higher retirement income. NUE is major steel company which has grown sales from a token amount in 1966 to over $20 billion, although the last recession hurt financial results. NUE has increased the annual dividend since 1973, when it first started paying dividends. The dividend should be increased in December, probably by a small amount (the last two annual increases were a penny in each year). Higher forecasted earnings for next year could bring a more significant increase. Its yield is 3.75%.

Increasing income in retirement accounts requires investors to work harder than the past. The very highest yield securities, primarily in stocks, are excluded because the related risk is too much for a large majority of retirement accounts. But junk bond funds have attractive yields when extra risk is accepted. Investment grade bonds have mediocre yields, high in safety but income is limited. REITs and MLPs have respectable yields with tax advantages. KMR and EEQ, with yields near junk bond yields, are helpful when current income is not needed. Dividend increases bring higher retirement income in later years when it is most needed. I have a soft spot for Dividend Aristocrats; they will deliver higher income over time. The highest yielding ones provide generous yields and growing dividends for increasing retirement income.

Disclosure: I am long EEQ. 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.