Alternatives For Yield

By Aaron Levitt | June 23, 2010 AAA

With the market returning to its zig and zag, up and down pattern as of late, and with fears of European austerity rearing its ugly head, many investors have been looking for safer and steadier places to park their cash. However, with interest rates near zero, CDs, money markets and short term investments such as the PIMCO Short Maturity Strategy ETF (NASDAQ:MINT) are paying next to nothing. Retiring baby-boomers are facing a quandary of where to get significant income while still maintaining some safety.

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Getting Better, But Not Perfect
The financial crisis had its way with dividend payments. Nearly $44 billion in distribution payments vanished from investors' pockets in the quarter of 2009 as companies sought any which way to preserve themselves for the time being. However, 2010 is shaping up to be a much better time for those seeking dividends. Payouts increased nearly $6.4 billion in the first quarter of the year and only 48 of the nearly 7,000 companies tracked by S&P reduced their payouts. But even this good news can be short lived. Dividend stalwart, BP (NYSE:BP) was a model of cash flow and distributions to shareholders, but one environmental crisis later and investors are left scrambling to fulfill their lost income.

To that end, a broad-based dividend ETF, such as iShares Dow Jones Select Dividend Index (NYSE:DVY), might be a good solution, but investors do not need to stop there. The ETF boom has opened up many opportunities in other asset classes that pay strong dividends.

Adding Additional Yield
Convertible bonds are often a misunderstood security type. Convertible bonds can be exchanged for a specific number of shares of the issuer's common stock. Their chameleon-like nature confuses many investors and they are simply ignored in most portfolios. However, these stock-bond instruments might just be what an income investor needs in a side-ways market. The SPDR Barclays Capital Convertible Bond (NYSE:CWB) has gained about 30% since it started trading a year ago. For investors looking for current income plus maintaining potential upside if equity markets keep rising, the ETF is a good bet.

Similarly crossing the stock-bond tight rope, preferred stock shareholders, in exchange for zero voting rights, get a steady stream of dividend payments and preference in bankruptcy situations. The PowerShares Preferred Portfolio ETF (NYSE:PGX) follows a basket of 67 different issuers and offers a 7.5% dividend yield. The fund is heavy in financial firms and may be a better way to participate in bank stocks, due to the higher ranking preference of its security type, rather than Financial Select Sector SPDR ETF (NYSE:XLF).

Investors are shunning developed market sovereign debt as the fears about the fate of the euro are still strong. However, there are many strong international firms located within the eurozone's borders that still need to raise money. The new PowerShares International Corporate Bond Portfolio ETF tracks investment grade corporate bonds from non-U.S. issuers. The fund has a wide swath of currency exposure with investments in Australian dollars, pounds, Swiss francs, Norwegian krona and yen. The fund's implied distribution yield is 3.35%.

Finally, investors looking to move up the risk ladder and invest in "real assets", both energy master limited partnerships (MLP) and real estate investment trusts (REITS) offer outsized dividend yields. The JPMorgan Alerian MLP Index ETN (NYSE:AMJ), which yields around 6%, and the iShares Cohen & Steers Realty Majors (NYSE:ICF), which pays 3.3%, are great ways to play the sectors.

Bottom Line
With the return of volatility, dividend investing is becoming popular once again. However, investors may need to think outside the box in order to get the yield needed to live off their portfolio income. The ETF boom has opened some interesting areas for regular retail investors to gain that income. The previous examples are just some of the ways to participate in these "alternative" asset classes with one ticker. (To take full advantage of these vehicles, you need to know how they can fulfill certain strategies. To learn more about ETFs, see How To Use ETFs In Your Portfolio.)

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