Where Can Investors Earn Yield?

By: Mike_Larson

Municipal and state debt? Nope. Long-term U.S. Treasuries? Haha! Don’t make me laugh!

None of those are good places to generate income, for all the reasons I’ve discussed before — lousy economic fundamentals, the threat of rising interest rates, slumping investor demand for their bonds, and so on.

So where can you get some yield? What are some of the safer alternatives? Where the heck can you turn with the Federal Reserve waging a war on savers — by holding short-term interest rates near zero.

That’s what I want to help you with today …

“Safer” Sovereigns, Higher-Yielding Stocks, and MLPs Make Great Income Alternatives

Alternative #1: “Safer” sovereigns. Not all sovereign bonds are created equal. Portugal, Ireland, and Greece may be buried in debt, dealing with anemic growth or recession, and seeing their securities tank in price.

But the story is different in many other emerging markets …

China, India, Brazil, and others are benefiting from rising living standards, a flood of investor cash, and strong economic growth. Their credit ratings are going UP, not down.

Emerging market bonds offer attractive yields and a hedge against a sliding U.S. dollar.

So to me, their bonds are attractive both for yield AND potential capital gains. ETFs like the iShares JPMorgan USD Emerging Markets Bond Fund (EMB) are one way to profit.

Or you can screen mutual funds using a tool like Morningstar.com to find the best-performing, highest-rated funds in the emerging markets category.

Go to the website, click on “funds,” then “fund screener.” You can select “taxable bond” as the fund group, then “emerging markets bond” as the Morningstar Category.

From there, you can drill down even further — rank the results by number of stars in the funds’ rankings, eliminate funds that haven’t returned at least 1 percent, 2 percent, or more for a specified period, and so on.

Alternative #2: Higher-yielding stocks. Many stocks offer attractive yields, particularly those in the utilities and consumer staples sectors. Those industries offer slow, steady, predictable growth, and the companies competing in them tend to yield more than the market as a whole.

The PowerShares QQQ (QQQQ), which owns mostly technology and biotech stocks, yields just 0.76 percent while the diversified SPDR S&P 500 ETF (SPY) yields 2.02 percent. That compares with 3.5 percent for the PowerShares Dynamic Consumer Staples Sector Portfolio Fund (PSL) and a hefty 5.3 percent for the PowerShares Dynamic Utilities Portfolio Fund (PUI) — seven times more than the QQQQ!

Alternative #3: MLPs — or master limited partnerships. These are corporate entities that distribute most of the income they generate from certain activities, predominately producing, processing, or transporting oil and natural gas.

MLPs have a history of steady cash flow.

Many of these MLPs have mid-to-high single-digit yields, and they offer the potential for capital gains. The Alerian MLP Exchange Traded Fund (AMLP) is a recently launched ETF that gives you broad exposure to the sector.

Bottom Fishing? Wait Until You See the Whites of the Sellers’ Eyes!

None of these ETFs or funds will rise in a straight line. We’ll inevitably see some corrections along the way. But these are the kinds of sectors I’d focus on for yield.

Meanwhile, if you’re considering bottom fishing in muni bonds, long-term Treasuries, or any of the other sectors I’ve been panning here, my advice is simple: Don’t. You can catch small rallies if you’re extremely nimble. But the trend is still lower in price, higher in yield.

Instead, I recommend you wait for the right price and time — when you can see the whites of the sellers’ eyes. That’s when you should pounce and lock in juicy yields for the long term. I’ll do my best to let you know when I think the time is here.

Until then,

Mike

P.S. In this week’s episode of Money and Markets TV, we continued our review of 2010 by looking at some of the year’s hottest investments: Commodities and emerging markets.

If you missed last night’s viewing or would like to see it again, simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

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