What's the most important five-letter word for income investors? I think the answer is "yield." If you can get enough yield on your investments, you won't have many income worries.
To be sure, some higher-yielding assets aren't good picks. You can lose more from declining valuations than you make in distributions. However, other alternatives provide solid ways to generate income. Here are three smart ways to earn yields of 9.4% or more.
1. Ares Capital
Ares Capital (ARCC +0.85%) offers a dividend yield of nearly 9.7%. The company has paid a stable-to-growing dividend for 56 consecutive quarters.
What's better than that kind of dependable yield? Strong total returns. Ares Capital has handily outperformed the S&P 500 since the company's IPO in 2004 as well as over the last three-year and fie-year periods.
NASDAQ: ARCC
Key Data Points
Business development companies (BDCs) have become increasingly attractive sources of capital for small-to-medium-sized businesses. Ares Capital ranks as the largest publicly traded BDC. It's arguably the best, too.
Ares Capital focuses on middle-market companies that are built to last. It applies stringent criteria in evaluating every deal that comes its way. Thanks to its strong risk management, Ares Capital's average annual net realized gain since its IPO has trounced the performance of its BDC peers and of the overall banking industry.
2. DoubleLine Yield Opportunities Fund
You can get a slightly higher yield of over 9.8% with the DoubleLine Yield Opportunities Fund (DLY 0.07%). It's a closed-end fund (CEF) that can be bought and sold just as a stock can.
DLY is run by Jeffrey Gundlach. He's sometimes referred to as the "bond god." Unsurprisingly, DLY owns a lot of bonds, including those issued by corporations and governments.
NYSE: DLY
Key Data Points
There are some knocks against DLY. It uses leverage (borrowing) to boost distributions. Over 60% of its positions are in securities that are below investment grade, which are riskier. Bonds have performed atrociously in recent years.
However, I nonetheless think buying DLY is a smart move right now. Despite delivering a solid year-to-date gain, the CEF still trades at 6.7% below its net asset value. Also, bonds should return to their winning ways of the past if the Federal Reserve doesn't raise interest rates much more.
3. Energy Transfer
Energy Transfer (ET +1.29%) provides a distribution yield of more than 9.4%. The stock has also been a huge winner over the last three years, nearly doubling in price.
Even with its tremendous performance, Energy Transfer is a bargain. Its shares trade at low forward price-to-earnings multiple of 8.2x.
NYSE: ET
Key Data Points
Probably the main reason behind Energy Transfer's discount valuation is the nature of its business. The company operates midstream energy assets including pipelines and storage facilities for oil and gas. Many investors have largely written off fossil fuels with the increasing adoption of renewable energy sources.
However, the demand for oil and gas and the infrastructure that processes and transports the commodities won't evaporate overnight. Actually, there's a good chance that the demand for natural gas and natural gas liquids will grow significantly.
Energy Transfer is also exploring ways to jump aboard the clean energy bandwagon. The company has teamed up with Occidental Petroleum on a carbon capture and sequestration project.
