4 Easy Ways to Earn up to 11% Yields Right Now

Savvy investors know how to be creative and seek rich yields in unusual places. With the average S&P 500 stock yielding less than 2%, you have to explore off the beaten path to find big dividends. Luckily, there are little explored corners of the investment world where great yields can still be found. You just need to know where to look.

Carla Pasternak is an expert in this area. Every month her High Yield Investing newsletter searches out exceptional yields and, more often than not, she finds them in unusual places. Here are four high-yielding asset classes Carla recently highlighted in her newsletter. Most are unfamiliar to the average investor, yet each offers hefty dividends.

1. Business Development Companies (BDCs)
BDCs are the 21st century version of venture capital funds. There are only about three dozen of them out there, but most pay sizable yields, with a few exceeding 11%. BDCs make loans to small companies, often taking an equity stake as well, and pass the income along to their investors. BDCs paying great dividends right now include Black Rock Kelso (Nasdaq: BKCC), which yields 11%, and Apollo Investment Corp. (Nasdaq: AINV), which pays 10%. 

The yields are high because BDCs are required to distribute at least 90% of their income to investors. Dividends are paid at least quarterly and sometimes monthly.

With credit markets still tight, BDCs are prospering as they remain one of the few financing sources available to small companies. In addition, BDCs are less risky than many banks since by law they can’t let debt exceed equity. BDCs also diversify risk by owning stakes in as many as 50-100 companies at once.

2. Real Estate Investment Trusts (REITs)
Another great asset class delivering rich yields is REITs. These companies own office buildings, shopping malls, apartment complexes — virtually any type of real estate. REITs pay no taxes at the corporate level, provided they pay the bulk of income to investors as dividends. The U.S. REIT market is in an early stage of recovery, so the best REIT values right now are north of the border in Canada. Canadian REITs offer high yields, monthly payouts and growth prospects leveraged by a strong economy. (Canada was one of the first countries to recover from the global recession.)

There are about three dozen Canadian REITs. Many offer rich yields for cash starved investors. Yields on the biggest names like Riocan (REI-UN.TO) and Calloway (CWT-UN.TO) exceed 6% — that’s about twice what U.S, REITs yield and more than three times the S&P’s yield.

Canadian REITs also offer special tax advantages for U.S. investors. Their distributions often qualify for the reduced dividend tax rate or as a non-taxable return of capital. Distributions from U.S. REITs are taxed as ordinary income.

Canadian REITs trade mostly on the Toronto Stock Exchange (TSX), but that shouldn’t deter you. Most U.S. brokers can easily fill TSX orders. U.S. investors should be aware that there is some currency risk since these REITs trade and pay dividends in Canadian dollars.

3. Royalty Trusts
With oil prices soaring, wouldn’t it be great to own an investment that moves in sync with rising prices? You can do just that by owning a royalty trust. Most royalty trusts are structured around oil and gas. These assets currently yield upward of 6%. Even better, you don’t pay taxes on income until after the asset is sold. 

About a dozen royalty trusts trade on the New York and Nasdaq exchanges. Yields on popular names like Sabine Royalty Trust (NYSE: SBR) and BP Prudhoe Bay Royalty Trust (NYSE: BPT) currently exceed 6%.

A royalty trust makes money by collecting royalties on a percentage of oil, gas or mineral sales from a specific property. They are unique in that investors own a share of the revenue but not the underlying property. A big advantage of royalty trusts is that their distributions are not taxed as income. Rather, they are taxed at the lower capital gains rate instead.

Energy companies create royalty trusts to raise capital. The properties selected for the trust are generally steady oil and gas producers that are past their prime but still produce a reliable flow. Eventually though, the property runs dry, royalties shrink and the trust ends.

A U.S. royalty trust is not allowed to replace reserves as they run out so investors should learn the trust’s reserve life. More years are better since it means more revenue and distributions.

4. Energy Master Limited Partnerships (MLPs)

Another high yield investment benefiting from rising energy prices is the energy MLP. Companies in this sector currently yield 6-7% and pay quarterly cash dividends. Often, those payments grow as much as 7% a year. And best of all, they do so in a way that allows you defer taxes.

A particularly hot MLP investment right now is the coal MLP. [Carla recently talked about coal MLPs in this article.] These businesses benefit from record demand for coal. In the past decade, coal consumption has risen twice as fast as natural gas, and four times faster than oil.

Coal MLPs actually don’t mine an ounce of coal. Instead, their main activity is collecting royalties. These companies lease coal-producing properties to mining firms under long-term contracts. The benefit of this arrangement is that the coal MLP doesn’t incur mining costs or related risks. Yields are high because, as part of the partnership agreements that create them, coal MLPs are required to pay out most of their cash flow to investors in quarterly distributions.

Coal MLPs trade on major U.S. exchanges like common stocks. The best offer steady distribution growth on top of generous yields. Only seven companies operate in this space, but names like Natural Resource Partners (NYSE: NRP) and Penn Virginia Resource Partners (NYSE: PVR) yield north of 6%.

Action to take–> Of these asset classes, my top pick for aggressive investors is Black Rock Kelso. This BDC offers growth prospects and an impressive 11% yield. Risk-adverse investors may prefer the reliable payout of coal MLP Penn Virginia Resource Partners, which yields close to 7% and has sizable coal reserves.   

[Note: This is just the tip of the iceberg. Carla is finding huge yields for her High-Yield Investing readers in the most unlikely of places. To learn more about her newsletter, go here.]