Millions of Americans rely on income-producing investments to make ends meet. But with interest rates at historic lows and traditional low-risk vehicles paying rock-bottom returns, more and more investors are turning to obscure investments that promise much more income than you'll get from a bank CD right now.
But these vehicles come with their own particular quirks, and all are riskier than an FDIC-insured bank account.
Let's take a look at five investments you ought to know more about. While you shouldn't put all your money into any single one of them, as part of a diversified portfolio, each could have a role to play in helping you boost your income.
5 Obscure Investments to Boost Your Income
5 Obscure Investments to Boost Your Income
Primarily covering the energy and natural resources sectors, master limited partnerships take advantage of favorable tax laws to distribute cash to investors in a tax-efficient way.
Recently, the need for pipelines and other energy infrastructure to transport huge, newly-discovered oil and natural gas reserves has helped MLPs like Kinder Morgan Energy Partners (KMP) and Enterprise Products Partners (EPD) to grow substantially while paying distribution yields of between 4 percent and 6 percent. Many MLPs pay even higher yields, however, and with those payouts often being tax-advantaged, you'll potentially lose less of your income to Uncle Sam.
The downside: MLPs can make your tax preparation a lot harder, as complicated reporting requirements make them harder to deal with than an ordinary stock investment.
Another tax-law provision gives favorable tax status to real-estate investment trusts. REITs make investments in real estate-related assets, and they're required to pay out almost all their income to their shareholders annually.
Simon Property Group (SPG) is one of the biggest REITs, focusing on shopping malls and paying a 3 percent yield. But other specialty areas of the REIT universe pay much higher dividends, with REITs like Annaly Capital (NLY) that invest in mortgage-backed securities topping the list with double-digit percentage yields.
Beware, though: Many mortgage REIT dividends fallen recently as the Federal Reserve has invested heavily in mortgage-backed securities.
If you like the idea of profiting from helping small businesses grow, then business development companies may look attractive to you. BDCs provide financing to growing small private businesses, typically through loans that may also include the right to take an ownership position in a company.
With extensive portfolios, BDCs are typically well-diversified, and many of them, including Prospect Capital (PSEC) and Apollo Investment (AINV), pay yields approaching 10 percent. Some BDCs, however, don't pay any dividends at all, so be sure you look closely before you commit your capital to a BDC.
These precursors to exchange-traded funds have been around for decades. Closed-end funds own diversified portfolios of investments, and some, such as PIMCO High Income (PHK), use a combination of high-yield junk bonds, leverage, and managed payouts to maintain distribution yields well above 10 percent.
What to watch out for: Sometimes, the income that closed-ends pay is actually a return of investors' capital. Moreover, closed-end shares can trade at big premiums to the value of their underlying assets, causing high-risk situations in which your investment can lose value even if the underlying portfolio owned by the fund goes up.
Trust deeds involve direct investment in loans secured by real estate. Unlike mortgage-backed securities, which represent bundles of loans involving thousands of different mortgages that have been packaged and repackaged, trust deeds are directly tied to individual properties.
Because of the difficulty that many homeowners have had in recent years getting traditional mortgages, trust deeds offer attractive yields, with some in the high single-digit to low double-digit return range. You can also buy pools of trust deeds that give you partial interests in a larger number of different properties.
The downside: If a borrower stops repaying the loan backed by the trust deed, you may be forced to take action such as foreclosing to preserve your investment, and if real-estate prices have fallen, your entire investment can be at risk.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. He has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool owns shares of Annaly Capital.