Income investors understand all too well the challenges they've faced in recent years. With interest rates at rock-bottom levels, it's harder than ever for those seeking income to find it from traditional fixed-income sources. Yet that doesn't change the fact that many investors need that income to make ends meet.
The quest for income has led even conservative investors to look toward investments they may never have heard of before. That's taken everyone out of their comfort zones, and in some cases, it's exposed investors to risks that they may not even be aware of.
This week, I'm going to take a look at four popular sources of income that many investors have focused on over the past few years. My goal in looking at these areas is to help educate those who may not fully understand what they've got into in particular types of investments, and to help uncover opportunities to enrich yourself through smart investing decisions.
The four areas this series will discuss are:
1. Real estate investment trusts
Because real estate helped spark the financial crisis, investors have been understandably leery about getting into real-estate related investments. But REITs have gotten a lot of attention because of their income potential. In particular, Annaly Capital (NYSE: NLY ) and similar REITs that share the strategy of owning highly leveraged portfolios of mortgage-backed securities have captured income-hungry investors with their double-digit yields. Yet with concerns about whether those high yields can last given recent moves from the Federal Reserve, you need to understand the risks you're taking on with mortgage REITs right now.
2. Master limited partnerships
The energy industry has seen plenty of ups and downs over the years, as the commodity boom of 2007 and early 2008 took energy prices sky-high before crashing down with the stock market in late 2008 and early 2009. Yet while exploration and production companies have suffered huge swings through all that turbulence, specialized entities known as master limited partnerships, many of which focus on midstream operations like pipelines and storage, have benefited from greater production volumes following major discoveries of oil and natural gas throughout the country. Kinder Morgan Energy Partners (NYSE: KMP ) , Enterprise Products Partners (NYSE: EPD ) , and dozens of similar MLPs benefit from tax laws that help them avoid double taxation while paying excellent yields to their unitholders. Yet as Washington struggles for revenue-raising opportunities, you can't ignore the threat to MLP tax status in deciding whether to buy.
3. Dividend ETFs
Rather than choosing individual stocks, many investors prefer to go with exchange-traded funds with an income focus. By owning a basket of income stocks, you avoid the risk that any one company will tank your portfolio with bad news. Yet the number of ETFs available for dividend investors has soared, with Vanguard High Dividend Yield ETF (NYSEMKT: VYM ) focusing on maximizing current yield while competing products give more emphasis to long-term dividend growth prospects. Finding the right mix takes an understanding of all the options available to you.
4. Telecom stocks
Ever since AT&T (NYSE: T ) became a publicly traded stock, millions of investors have looked to the telecom industry for solid, reliable income. Even after the breakup of AT&T into its component regional parts, investors saw the so-called "Baby Bells" as utility stocks, providing necessary services under regulated conditions. Yet as landlines have given way to the mobile revolution, telecom stocks now have huge potential for growth. They're also no longer the safe utility-like plays that they used to be, although their dividend yields remain among the highest of blue chip stocks. You have to understand the ins and outs of the players involved to make a smart choice among them.
Learn it all
So stay with me over the coming week as I look at each of these four areas in greater detail. By the end of the week, you'll be in a much stronger position to evaluate your income prospects and make a well-informed choice.
Up tomorrow are mortgage REITs. If you don't want to wait, though, get the full scoop on Annaly Capital now by reading our premium research report on the stock. Inside, you'll learn about the crucial issues that investors need to understand before buying Annaly, as our analyst runs through the future opportunities and pitfalls of its strategy. Click here now to claim your copy.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.