It's one of the biggest trends of our lifetime, yet you hardly hear anyone talk about it anymore.
And while the tipping point may have happened a few years ago, we're still in the early innings of a very prosperous trend.
Think about it... There's currently $20 trillion sitting in U.S. mutual funds, with most of those assets held by soon-to-be retirees, according to the Investment Company Institute.
A former colleague of mine put it best: "As baby boomers wind down their working years, they're going to do what retirees before them have done -- shift from riskier stocks and commodities into more buttoned-down income investments. In fact, given the rocky market in the past decade and disappearing pensions, the shift could be larger than most people think."
In short, we're talking about a potential golden age for income investing.
Now, don't get me wrong... I'm not advocating for blindly buying any income-paying security you may come across. There is no guarantee the graying of the baby boomers will simply lead to a massive bull market across all income securities. That's why it's still very important to select high-quality income investments -- ones that pay a sizable, rising dividend, and carry a degree of safety so you can rest easy owning them. If you do this, then the massive trend I'm talking about will be gravy.
With all this in mind, I spent some time thinking about some tips to help you find the best high-yield plays for maximizing returns. Theese are what I use to guide my portfolio choices over at High-Yield Investing.
No matter your experience level, they should give you an edge in finding the best high-yield investments on the market.
Tip No. 1: Look off the beaten path
Always remember: yield is a function of dividends and share price.
If prices rise, the yield on a security falls, all else being equal. So if millions of retirees start buying popular high-yield securities in search of solid income, then their prices would likely rise, pushing yields down.
That's why it's valuable to look off the beaten path for higher yields -- particularly into the special classes of securities built for income investors.
Many of the securities I recommend in High-Yield Investing are nowhere near household names. And that's OK. My years of researching the income field have uncovered the rarest, most lucrative income assets, including securities such as business development companies, master limited partnerships and even exchange-traded bonds.
This is where you'll uncover truly mouth-watering yields the majority of investors who are focused on common stocks tend to overlook.
Tip No. 2: Dividend safety is key
For income investors, nothing should be held in higher esteem than the safety of dividends. After all, what's the use of a high dividend if it's only going to be cut a few weeks later?
This is where metrics like the dividend payout ratio come into play.
But also remember that (again, all else being equal) we would much rather take a lower yield now, and watch it grow over many years, than take a higher yield now that never moves an inch. (I touched on this concept in this article.)
Also, remember that common stocks are under no obligation to pay a dividend; management can cut their payments at any time they please. But I've found a few securities -- such as preferred stocks -- that can't change or reduce their payments. A number of other little-known securities have the same restrictions, all but guaranteeing you'll be paid a stream of income you can count on.
Tip No. 3: Use market downturns to find higher yields
Most investors look at a market downturn as a bad thing. And while I would rather the market rise than fall, I also appreciate the opportunities that appear in a downturn.
As I said, a stock's yield is a function of its price. If a stock pays $1 per share and trades at $20, its yield is 5%. If the same stock dips to $10 per share, the yield has risen to 10%.
That's one reason why I buy good stocks heavily during market downturns when the yields become too high to ignore. If you can stomach volatility during a bear market, then you'll likely have a chance to lock in unusually high yields.
Tip No. 4: Don't be afraid to sell
High-Yield Investing subscribers always ask me when they should sell their holdings. And for good reason -- when you sell is just as important as when you buy.
Personally, I'm never afraid to sell. Many investors continue holding losing stocks and hope for a rebound, only to watch them sink further. I've seen this countless times. That's why I'm always sure to look at the reasons a holding is falling and if I should sell.
If the stock is falling with the market, then I may not be worried. However, if changes in the company's operations mean it could see rocky times ahead, then I don't want a part of it.
Tip No. 5: Taxes matter
Another scenario where a lower yield can be more attractive than a higher yield is when you factor in how much Uncle Sam gets involved,,.
Consider this: An investor is invested in a municipal bond that pays 6%. Because the income from this bond is tax-free, the taxable-equivalent yield could be as high as 9.2%, depending on your situation. In other words, if the same investment were in a fully taxable security, then our investor would have to earn 9.2% to have the same income after taxes.
It doesn't take long for that difference to add up to serious cash.
Action to Take
In my experience, the sooner these tips are put to work, the sooner you'll have a chance to collect a healthy income stream for your retirement.
Remember, your livelihood during your golden years is important. If you want to spend less time worrying about bills and more time doing the things you want, then you can't afford to play catch-up. That's why you need to see my latest report. I've found yields as high as 11.2%, allowing readers to live a more worry-free retirement. To access my latest findings, click here.