Income is hard to come by these days. Treasuries are yielding less than 5%. The bond market is in disarray, credit spreads are widening (meaning the price of existing bonds is declining) and there are serious liquidity issues (which also impact value).
Have you considered Real Estate funds? Many have current yields in the 5 - 8% range (primarily REIT – Real Estate Investment Trust – funds). Now, let’s be clear on this. These are equity funds and equity funds carry greater risk, and have greater volatility, than bond funds. (Of course, investors in subprime mortgage funds have found out that debt funds are not without risk!) However, equity funds also offer the potential for increasing income and capital appreciation (see Too Much Income can be Hazardous for Your Heath).
Real Estate funds cover a lot of territory and you want to make sure you know how your fund invests. I went to the MUTUALdecision Top Ten Real Estate funds list and selected two: CGM Realty and Cohen & Steers Realty Focus I (Cohen & Steers are the godfathers of real estate funds). Take a look at their holdings. CGM’s biggest holdings include two international mining companies, two real estate brokerage companies and one REIT. The Cohen & Steers fund’s largest holdings are all US REITs. Both are excellent funds but they have very different investment strategies. CGM is more capital appreciation oriented where as Cohen & Steers is more income oriented. The moral to this story is that you have to drill down into a funds’ portfolio to make sure it’s right for you. (In addition to looking at the stocks it owns, be sure to check for leverage, see Leverage Land Mines.)
Income oriented investors should focus on REIT funds (although, I'd aviod funds that hold mortgages right now). REIT stocks, in general, have declined more in price during the current market correction than has the Dow or S&P 500. Some argue that REIT stocks were overvalued. Whether or not that was true, many high quality REITs are now yielding in excess of Treasuries. Historically, this has been a good entry point. Of course, many high quality REITs are still yielding in the 2 – 4% range, so the correction in the REIT market may not be over. And, one of the drivers of REIT stock prices – buyouts by private equity firms – may be ending. (For more information on REIT funds see Real Estate Funds are in a Class of Their Own.)
On balance, though, this appears to be a good time for income oriented investors to own REIT funds. Pick a good fund and you’ll get high current income and an investment whose value and income stream will increase over time.
