10% Yields Are Easy With These 3 Stocks

In the interest of debunking the myth that high yields mean unsafe investments, here are three high-yielders that do a great job of managing risk while producing excellent income.

Feb 25, 2014 at 11:00AM

I was recently having a discussion with a friend about retirement strategies, and the topic of our "numbers" came up -- that is to say, the amount of money that we would need to retire completely comfortably. I said that I would want $1 million, and I justified this by explaining that I could extract $100,000 in annual income (pre-tax) in perpetuity, to which he responded that there is absolutely no way to earn 10% returns safely in today's market.

Well, I obviously disagree. While it is true that high-yielders generally come with more risk than blue-chip stocks, the notion that all high yielders are dangerous is just plain wrong. Here is a list of three stocks and funds that all have high yields and are of reasonably low risk to make up a part of anyone's income portfolio.

An easy way to use complex options strategies
The first example is the Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (NYSE:ETW), which currently yields 9.7% annually, and pays distributions every month. While this is a bit shy of the 10% figure I mentioned earlier, I love this fund for a few reasons. 

First off, it's cheap. The fund trades for about 7.5% less than its net asset value (NAV), which is the sum of the fund's assets minus its liabilities. So, in other words, you can buy a fund that is worth $13 per share for about $12 per share. Second, it has a good track record of performance, having returned an average of 16% annually over the past five years, including both distributions and price appreciation.

Finally, I just love what this fund does, employing one of my favorite income strategies and saves me the work of actually doing it: investing in a diverse stock portfolio consisting of solid and often undervalued companies. Its top three holdings are Apple, Google, and Microsoft, and no single stock accounts for more than 4.3% of the portfolio. The fund managers then write covered call options on the portfolio to generate income from its holdings, and pass the profits to the shareholders.

102 high-yielders rolled into one
Another great choice is the Wells Fargo Advantage Global Dividend Opportunity Fund (NYSE:EOD), which pays out a 9.5% yield with quarterly payments. This fund invests in global stocks that pay solid dividends and have a high probability of increasing those dividends over time. In addition, the fund also employs some options strategies in order to achieve its income objectives.

The portfolio is very diverse (meaning that it's safe) with 102 different stock holdings, and is heavily weighted in the utilities, financials, and communications sectors.

What about the mREITs?
Of course, no discussion of high-yielders would be complete without mentioning the mortgage REITs.  Now, although these companies all pay relatively high dividends, not all are created equal. Some use much higher leverage than others and employ more aggressive strategies to maximize their income.

However, our purpose here is to maximize our income in a relatively safe manner. With this in mind, even though it is the biggest and most widely covered, Annaly Capital Management (NYSE:NLY) truly is the best in breed. The company is trading at a substantial discount to its book value, especially when looking at its historic valuation.

NLY Price to Book Value Chart

NLY Price to Book Value data by YCharts.

Annaly currently yields about 11.2%, which is actually relatively low in the mREIT sector. The company's profits (and share price) have dropped recently as spiking interest rates have cut into the spreads that Annaly makes its money from. 

Fortunately, Annaly's management had the foresight to reduce the amount of leverage it had been using. Although that eats into current earnings a bit, it allows the company to pounce on profitable opportunities as they come up. Now that the Federal Reserve has begun (and stuck with) its long-awaited taper, it has provided some direction and stability to interest rates, which is what companies like Annaly need in order to thrive. With the uncertainty in the Fed's monetary policy is behind us, we should see relatively stable rates going forward.

Annaly has historically averaged around a 12% dividend yield, and the lower current yield is most likely due to the lowering of leverage.  In addition, investors are likely uncertain about Annaly's next dividend payment.  It will most likely be either $0.30 or $0.35 per share, and the former would translate to a $10 share price at 12%, and the latter would mean $11.67. Currently, the price is right in the middle of the two.

This is by no means an exhaustive list -- there's a long list of stocks and funds with high yields. These are just a few that do a great job of managing their risk which producing high levels of income for shareholders.

Nine more to consider
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Matthew Frankel owns shares of Annaly Capital Management. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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