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Wednesday, April 18, 2012

In Search For A Safer Higher Yield

None of us wants to take a pay cut. On the contrary, in addition to a good wage, we have grown accustomed to periodic raises. Chasing high yield investments can often leave you with a pay cut. There has to be a better way to generate higher income while keeping risk in balance.

Risk and yield are related. Risk-free investments won't earn you 15% yields and as anyone who has recently purchased a government bond or an insured CD can attest to, "safe" investments aren't paying very well these days. Understanding this I began experimenting with a higher-risk, higher-yield portfolio (HRHY) last year. After one year it is impossible to determine its long-term outlook, but the early results have been promising.

When I started the HRHY portfolio it was my desire to target a yield of 5-9%, while selecting stocks with long history of dividend increases to mitigate the risks of higher yield investments. Given the higher risks associated with this portfolio I have limited it to no more than 10% of my total portfolio.

The portfolio holds mostly utilities and REITs. However, its current yield of 4.6% is slightly below my targeted minimum of 5%. A REIT ETF along with a Utility ETF are pulling down the portfolio's yield. I plan to reduce my positions in these ETFs, but the question is where to invest the proceeds at a significantly higher rate, without taking on undue risks.

After searching around, what I found were several investments that are yielding between 7% and 9% that pay a steady distribution...

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