Ways for investors to earn income despite low rates

Q: With the Fed holding interest rates down so low, are there any ways for investors to get income?

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A: You can almost hear the groan from income-craving investors when the Fed says it's going to hold short-term interest rates down.

Investors who count on getting a stream of cash from their investments aren't fans of low interest rates. Savers are the ones hurt most by chronically low short-term interest rates, as they get next to nothing from their cash. Even so-called high-yield savings accounts are paying less than 1% a year in interest, which isn't even enough to keep up with inflation.

U.S. Treasuries and certificates of deposits, two traditional havens for people looking for income and little risk, aren't doing it either. Yields on these vehicles also aren't providing enough return to beat inflation.

The only answer, sadly, for people looking for income is to either make do with less income or take on more risk. Some savers might look for ways to reduce their monthly expenses, allowing them to live off the low yields until they rise in the future.

The other strategy, albeit a potentially dangerous one, is to take on more risk. There are several investments that are candidates for investors looking for more income and willing to take on more market risk with their principal. Those include:

Corporate dividends. Most large companies make periodic payments of cash to their shareholders. These dividends can be very lucrative as they accumulate over time. But investors are subjected to two huge risks. First, the company can suspend the dividends at any time or cut the size of the dividend. Furthermore, the price of the stock rises and falls and can threaten investors' principal.

Preferred stock. Some companies issue a unique investment called preferred stock. These shares pay a dividend that's typically much higher than the yield on the common shares. The companies can suspend the dividend payments at any time, though, making it similar to common stock dividends.

Corporate bonds. Investors who feel comfortable with the prospects of certain individual companies with stellar credit ratings might get better yields from bonds. Bond payments cannot be suspended, without a corporate default, so investors get a bit more security unless a company is in serious trouble. The price of bond securities can rise and fall, though, which can inflict losses if the investor must sell.

Equity-linked certificates of deposit. Banks and insurance companies are trying to woo investors who aren't willing to give up stock market returns. These CDs attempt to allow investors a minimum return and offer a bonus kicker if the stock market does especially well.

Master-limited partnerships. MLPs have gone mainstream after spending years in obscurity. Companies, typically energy pipeline companies, structure themselves as partnerships and pass relatively large dividends to investors. Since MLPs are typically in the energy transportation business, they tend to be relatively stable.

As you can see, income is getting so hard to come by that investors seeking it must journey far and wide. Each of the investments mentioned above comes with its own unique risks, which may not be worth the trade-off of the extra yield.



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