Have you ever been traveling somewhere and opted for a scenic route to make your trip more enjoyable? Many of the world's savviest investors also travel a different path in an effort to avoid a lackluster performance in their investments.
Because they are willing to go off the beaten path in the quest for superior returns, they follow a different set of rules. That's why many of these investors want to get paid two ways -- with capital appreciation (buy low, sell high) and cash flow (dividends). To accomplish this, they often seek out investment opportunities few know about.
These "Secret Wealth Investments" go largely ignored by the average investor. They're not overly sexy and they don't get many headlines in the financial press, but they pay some of the market's best dividends. In fact, some of these "Secret Wealth Investments" are FORCED by the government to pay out 90% of their profits to investors.
Here are five types of "Secret Wealth Investments" worth considering for your portfolio...
1. Real estate investment trusts (REITs): REITs offer investors an opportunity to gain access to a real estate portfolio without the headache of being a landlord. REITs typically include high-quality commercial properties, ranging from apartment buildings and office complexes, to health care facilities and shopping malls. Because REITs have no investment minimums, they allow large and small investors an easy way to participate in commercial real estate.
The best part: REITs must pay out 90% of its operating profits as dividends in order to be exempt from having to pay corporate income taxes. As a result, most REITs pay frothy dividends.
With so many REITs available, I've narrowed down my favorites to two choices. With a 5% dividend yield, W. P. Carey Inc. (NYSE: WPC) is engaged in providing long-term sale-leaseback and build-to-suit financing for companies. I like this REIT because it has a very low lessee default rate (less than 2%) and has done well through good and bad economies. I also like National Health Investors Inc. (NYSE: NHI), which also sports a 5% yield. It invests in income-producing health care properties primarily in the long-term care industry. With an aging population, senior housing and long-term care are going to be in high demand for many years to come, so National Health should be able to capitalize on this trend.
2. Master limited partnerships (MLPs): Investors keep searching high and low for better yields, but many miss the boat on MLPs. Few investors have a good knowledge of MLPs, because they have the stigma of being too mysterious and complex. But investing in MLPs isn't that difficult. Like a traditional stock, these investments trade on public exchanges, having outperformed the S&P 500 in 11 of the past 12 years.
Take a look at the five-year chart below…
From 2008-2012, the average annual return for MLPs was nearly 13% compared to less than 2% for the S&P 500. Today, the average MLPs yield close to 7%, which is more than three times the current average yield of the S&P's 2.2%. Almost all MLPs are pipeline businesses making money from the processing or transport of oil, natural gas or coal. Thanks to strict environmental regulations, they don't face much competition. And because they transport these commodities rather than explore them, they are theoretically less affected by ongoing volatility in commodity prices.
One MLP worth a closer look is Linn Energy (Nasdaq: LINE), which acquires, exploits and produces from oil and natural gas properties in the United States. What I love about this MLP is its hefty 8% dividend yield steady cash flow, especially since I'm very bullish on natural gas.
3. Business development companies (BDCs): A BDC is a form of publicly-traded private equity that loans money to small and upcoming businesses. In return for taking the risk of loaning the money, these startups pay the BDC interest, often also offering an equity stake.
Because they are required to pay regular dividends, income from BDCs is generally more stable than that of regular dividend-paying stocks, especially during the ups and downs of the economy. They also have a diversified asset base, typically consisting of a portfolio of 50 or more loans/equity. Because of this nature, BDCs have plenty of capital available for growth.
Triangle Capital Corp. (Nasdaq: TCAP), which pays a healthy 9% yield, is a good place to start. It holds debt instruments and makes direct equity investments in each of the companies it loans to. Within its portfolio, you will find companies such as Ambient Air Corp., a market leader in commercial heating and cooling systems, and Ann's House of Nuts, a growing trail mix food company. With a very strong portfolio of up-and-coming companies, Triangle Capital is worth considering.
4. Preferred stocks: These stocks tend to pay sizable dividends typically greater than those of common shares. They have characteristics of debt instruments as well as equities. One of the major advantages of a preferred stock is the priority dividend payout. This means preferred shareholders get dividends before the common shareholders. Dividends payout on preferred stock is very similar to coupon payments on a bond. Preferred stocks don't have a maturity date like bonds, but they do have a par value, which is used to figure out the payouts.
Two preferred stocks options on my radar include iShares S&P U.S. Preferred Stock Index (NYSE: PFF), and exchange-traded fund with a 6% dividend and PreferredPlus Trust Ser FAR 1 T (NYSE: PJS) with a 7% payout. Both of these stocks provide investors with a diversified pool of preferred stocks and attractive yields.
5. Closed-end funds (CEFs): They are mutual funds with a limited number of shares (or units), and differ from traditional open-ended funds, which consistently issue new shares. Shares of CEFs trade on the open market at a premium or discount to its net asset value (NAV). The key to investing in CEFs is to buy shares at a discount. Why closed-end funds sell for discounts is a bit mysterious, as share prices are dictated by supply and demand rather than the underlying asset values. One reason could be that many investors factor in their estimate of a fund's future performance and often undervalue these assets.
Virtus Total Return Fund (NYSE: DCA), a hybrid stock and bond fund with a current yield of 5%, a 12% discount from NAV and strong management team make this one of my top picks. I also like First Opportunity Fund (OTN: FOFI), which is the only CEF that has significant holdings in hedge funds.
Action to Take --> For investors looking to build wealth and generate a healthy dividend income along the way, these five investment niches are certainly worth a closer look and even a position in every investor's portfolio. They may be a bit off the beaten path, but often deliver above-average performance. The stocks I mentioned above are a great place to start your research.