I mentioned earlier this week that the IRS threw us a few bones in 2020.
For those of us saving for retirement, we can dump more into our 401(k) plans and IRAs. But for those already retired and in need of income, 2020 looks to be another challenging year.
The average yield on a savings account is just 0.43%, and the highest you can hope to get on a U.S. government bond is 2.4%. That’s if you’re willing to take your chances on a 30-year bond. The rate on the two-year T-bill is a paltry 1.58%.
It’s worth noting that the 30-year yield barely covers the Fed’s inflation target of 2%…
The Fed has publicly said several times that it is comfortable with inflation running higher than that for an extended period of time.
I don’t know about you, but that’s not going to cut it for me. I need a higher yield than that.
So, let’s look at some of the best high-yield options for 2020. Many of these securities I cover in my income newsletter, Peak Income.
Government bonds yield so little they’re worthless.
But corporate bonds are respectable these days, if you’re willing to accept modest credit risk.
AAA-rated bonds yield more or less the same as U.S. Treasury bonds, so there’s not much point in buying them. AA and A-rated bonds offer a bit more bang for your buck.
You can get a AA-rated bond from Alibaba (NYSE: BABA) maturing in 2027 at a yield of around 2.6%. If you’re willing to go a little further out on the yield curve, you can get a AA-rated bond from Berkshire Hathaway Financial Corp — a subsidiary of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) — maturing in 2048 at a yield of 3.2%.
You’re obviously not getting rich on that yield, but it’s a lot better than the 0.43% on offer at the bank!
“High-dividend” stocks might be something of a relative term these days given where the average dividend yield is, but if you’re willing to shop around you can find some stable blue-chip names sporting a respectable yield.
For example, the iShares Select Dividend ETF (NYSE: DVY) yields 3.5%. Again, you’re not living the high life on 3.5%, but that’s respectable in this environment.
DVY is a decent income option because it’s diversified and has relatively low fees. It gives you a basket of 100 high-yielding dividend stocks with at least a five-year track record of paying dividends.
Closed-End Municipal Funds
Now we’re getting to the good stuff. One of my favorite go-to sectors in Peak Income is the closed-end municipal bond fund market. It’s not uncommon to see yields of 4% to 5% or even higher, and the best part is that they’re tax-free at the federal level.
If you’re in a high bracket, this is a really big deal. At the 37% bracket, a 5% yield is the equivalent of an 8% taxable yield.
Buying a closed-end muni fund is a little different than buying a traditional muni bond mutual fund. The funds often juice their returns with leverage, which adds a little risk. And because closed-end funds are not redeemable like regular mutual funds, you can get quirky situations where the stock price of the fund dips well below its net asset value.
But rather than a risk, I see this as an opportunity. I routinely look for closed-end muni funds trading at deep discounts to net asset value, as this often gives us the opportunity for capital gains in addition to a killer tax-free yield.
Oil and Gas Pipelines
If you really want to goose your income stream in 2020, give midstream master limited partnerships (MLPs) a look.
I’m a conservative investor who generally steers clear of the energy sector. I can’t have my income stream tied to something as volatile as the prices of crude oil or natural gas.
But this is the beauty of the midstream sector.
Midstream MLPs don’t produce energy or explore for it. They don’t refine it. And they don’t market it. They just move it from point A to point B.
Often, the midstream operators will be paid based on the volume transported rather than the price. That’s important, and it’s something you need to watch for.
Fee-based MLPs are far less likely to get into financial stress and cut distributions than their peers who depend on a high oil price to turn a profit.
Out of respect for my Peak Income readers, I can’t share with you my favorite positions in the sector.
But I can tell you this: the JP Morgan Alerian MLP ETN (NYSE: AMJ) is a fund that tracks the popular Alerian MLP index. You can think of it as an index fund for the sector, and it yields a whopping 8.3% at current prices.
That’s not bad!
You have to work harder for investment income today than you did a generation ago. And frankly, I don’t see that changing any time soon.
If you know where to look, you can still score a respectable yield.