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Look Beyond Traditional Bonds for Income-Generating Investments


Look Beyond Traditional Bonds for Inome-Generating Investments

Written by: Mark Germain | Beacon Wealth Management

Although the Fed has inched up the discount rate a notch, with the fragile state of the global economy it appears unlikely rates will be climbing again much in the near term.

While that might be good news for borrowers, it doesn’t help “lenders” like retirees who require predictable income that once upon a time they could count on through traditional fixed income investments.

Fortunately, there are alternatives. However, alternative income-generating investments are not as “plain vanilla” as standard bonds, so we’re sure to spend plenty of time choosing them carefully and monitoring their performance. And as with all investments, we carefully consider their suitability for each investor based on the investor’s income and liquidity needs, risk tolerance and tax situation.

Here are three alternatives we have been using judiciously.

1. High-yield unrated municipal bonds. Key characteristics:

  • These are a long-term investment.
  • As with other muni bonds, the interest isn’t taxable at the federal level. However, unless the bond is issued by your own state, you’ll pay state income tax on the income.
  • Unrated muni bonds as a class have a higher default rate than rated munis, but a commensurately higher yield (6% is not uncommon) to offset that risk. It is therefore crucial to have an investment manager with lots of experience in this arena to be picking the unrated munis.

2. Private equity real estate. Key characteristics of a particular investment:

  • Properties are apartments in communities with at least a “B” rating (on a real estate industry scale).
  • The multi-family complexes have high occupancy rates.
  • The investment manager has a more than 20-year track record providing immediate cash flow, some of which is tax-sheltered.
  • Investments are in a diversified pool of properties.
  • Investment units are available as part of a “fund of funds” with the high yield and master limited partnerships (MLPs).

3. Midstream energy MLPs. Key characteristics:

  • The sharp decline in oil prices has depressed prices in this sector as much as 65%, regardless of credit quality, driving up yields.
  • Partially tax-sheltered cash flow in the 8-12% range is available.
  • Investors should have faith that energy prices ultimately will begin to reverse course.
  • Many MLPs have “increasing income” contracts, meaning that investors won’t be locked into today’s yields.
  • Investments have credit ratings, and some have high ratings even in today’s low energy price environment, due to strong balance sheets.

As noted, these investments aren’t for everybody, and must be chosen and monitored carefully, but suitably diversified income-seeking investors should at least give them a look.



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