Retirement: 3 Overlooked Asset Classes For Up To 12% Yield

Co-produced with Mark Roussin

The idea of retirement in 2020 looks much different than it has in the past. Today more than ever, it’s extremely important that investors focus more on their investments than in any time in recent history. In past decades, those planning for retirement had a sizable investment in fixed income instruments, reason being that government bonds, which are viewed as the safest investments, were paying upward of 8% yields. However, in today’s ultra-low yield world, retirement investing is entirely different from the past.

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With rates sitting at these historically low levels, retirees must look elsewhere to earn their much-needed retirement income.

Stocks (SPY)?

Nope. The yields are not any better:

ChartData by YCharts

Because traditional bonds and stocks do not produce enough income to satisfy the needs of retirees, we must look elsewhere. More specifically, we must look for less crowded sectors that are overlooked and out of investor’s attention.

This is exactly what we do at High Yield Landlord. Our goal is earn a safe and growing 7.5% yield and this simply isn’t possible with bonds and stocks in 2020.

We have much better success investing in real estate, preferred shares, and asset backed loans. Below, we discuss three overlooked asset classes to earn up to 12% income even in today’s low yielding world.

Invest Heavily In Income-Producing Real Estate

REITs (VNQ) have become the go-to alternative to bonds in low rate environments because they share many similarities to bonds but generate much greater income and protect against inflation.

Some say invest in rental properties, which can be a route for some investors, but REITs have historically generated higher returns while being much more liquid, professionally managed, and paying truly passive income:

Chart – REITs outperform Private Real Estate:

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In order for companies to apply for REIT status, they must distribute 90% of their taxable income in the form of dividends. Therefore, the control over the cash flow is given to the investors who are legally entitled to receive large dividend payments. It makes them ideal investments for retirees.

To this day, we can find high quality REITs that pay more than 6% dividend yields. A good example is EPR Properties (EPR), a net-lease REIT that specializes in experiential properties. It pays a generous 6.3% dividend that’s well covered and growing. Even better, it’s paid on a monthly basis.

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EPR is unlike your regular net-lease REIT in that it focuses on less crowded, niche property types that lack institutional demand. This includes movie theaters, golf complexes, ski areas, water parks and other experiential properties. This approach allows them to target higher growth and secure longer lease terms with their tenants. Right now, EPR enjoys 13 year long leases, and therefore, even if we went into a recession tomorrow, its cash flow would not change much at all.

We own ~30 retiree-friendly REIT investments at High Yield Landlord and recently increased our stake in EPR.

Mixing In Preferred Shares For Reliable Income

Another solid investment for retirees in this low interest rate environment are preferred shares. Preferred shares are equity investments that have special rules that distinguish them from the common shares. Most importantly, they have higher priority when it comes to a liquidation or dividend payments, and therefore they tend to be less volatile.

They also tend to have higher dividend yields than common shares – making them ideal income investment for retirees:

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We invest heavily in undervalued preferred shares that are backed by real assets. Our preferred share portfolio is called the “Safe Haven Portfolio” because it generates a ~7.5% yield with limited volatility.

How do we find undervalued preferred shares?

Many of our preferred share recommendations are focused on companies with strong assets, but poor track records and conflicts of interests, meaning their common shares are too risky, but the preferred shares are mostly unaffected (higher priority) and still enjoy high dividend yields.

A good example are the preferred shares of Colony Capital (CLNY.PJ) which pay a 7.3% yield and have ~10% upside to fair value. The company generates highly-predictable and consistent cash flow from a solid portfolio. However, because the company has a poor track record of shareholder value creation, the market is pricing the common and preferred shares at a discount. We agree that the common shares should trade cheaply, but the preferred shares are getting unduly punished and provide a good opportunity for retirees and other income investors.

It’s quite exceptional to get a 7.3% yield that’s defensive and resistant to recessions in today’s low-yield environment. We target these preferred share opportunities for reliable income in 2020.

A Look At Asset Backed Loans

Asset backed loans have been a particularly popular topic on the chat room at High Yield Landlord over the recent months.

There are varying ways to offer asset backed loans, but in the past, this route was only an option for the ultra-wealthy. Reason being is that the loan investor would actually be acting as the bank, so most investors do not have that type of wealth in their back pocket to offer. However, now there are platforms such as Groundfloor that allow investorsto invest in loans and easily build diversified portfolios.

A group of investors, starting with as little as $10, can commingle their funds to build a loan for a real estate investor. Here’s a picture from their website depicting what their platform does:

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Here’s why we like these investments as part of a well diversified income portfolio for retirees:

  • (1) Their non-correlation with publicly traded stocks can help us financially and psychologically during periods of high market volatility.
  • (2) Their short durations enable us to capitalize on stock market volatility to achieve superior long-term returns.
  • (3) The fact that the loans are backed with a first lien on the assets themselves decreases the risk of significant loss of principal.
  • (4) The 8%-12% interest rates offered on these loans in the era of 2% or less interest rates offered on savings accounts, short-term bonds, and CDs gives them an exceptional potential risk-reward profile as a short-term alternative to publicly traded markets.
  • (5) The ability to widely diversify across hundreds of these loans with as little as $10 in each one significantly enhances their liquidity and reduces risks negative total returns.

When markets get crazy and sell off by 10%, 20% or more within a few months, it can become increasingly challenging to keep a cool head and stay fully invested through the choppy waters. However, with an allocation to alternative, non-correlated investments such as asset-backed loans, the impact from stock market volatility to the overall value is somewhat mitigated. As a result, retirees are much less likely to panic and hit the sell button at the worst possible time and continue to earn steady income.

Investor Takeaway

Today’s low interest rate environment has made retiring much more difficult. This is especially true when you consider that stocks also are richly valued and set for lower returns going forward.

High-yield REITs can offer reliable income in any rate environment and have continued to grow in popularity with investors.

Another less-popular investment during retirement are preferred shares, which could act as bond replacements for defensive income generation.

The third little known area of investing to diversify your retirement portfolio are asset-backed loans. This is an area that’s still in the early stages for companies like Groundfloor, which has been around for less than 10 years.

There’s no perfect blueprint for investing in a low rate environment as things are much more difficult than when government bonds were yielding up to 8%, but the best advice one can give is to invest in lesser known and overlooked asset classes that continue to offer greater yield than other overcrowded, mainstream sectors.

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Disclosure: I am/we are long EPR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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