Looking for yield in the bond market is flat-out depressing right now. The 10-year U.S. Treasury yields 0.72%, and the 30-year yields just 1.47%. A million dollars invested in a portfolio of 30-year bonds would generate just $14,700 per year in interest. Don’t spend that all in one place!
But before you resign yourself to a retirement of eating dog food, take heart. There are still plenty of places to get dividend yield in this market.
Today, we’re going to look at some of the best sectors for dividends at today’s prices. Some of these are a little more aggressive than others, so you’ll want to be smart and keep your position sizes reasonable. But if dividend yield is what you’re looking for, we’ve got you covered.
Best Sectors for Dividends
Business Development Companies
I wrote about business development companies (BDCs) last month, calling them “some of the highest-yielding equities you’ll generally ever find.”
And BDCs are one of the best sectors for dividends.
Much of this is due to tax treatment. BDCs are exempt from federal income tax so long as they distribute at least 90% of their net income to investors. Cutting out the tax man frees up a lot more cash for dividends, allowing BDCs to pay out some monster yields.
BDCs are like private equity companies in that they make debt and equity investments primarily in established companies, though most BDCs focus on “middle market” companies that are often a little too small for the big boys in private equity. Importantly, BDC managers aren’t just passive investors. They often take an active role in management.
The VanEck Venctors BDC Income ETF (NYSE: BIZD), which holds a basket of the largest and most liquid BDCs in the space, sports a massive dividend yield of 12.2% at current prices. On a million-dollar portfolio that amounts to an annual income of $122,000 per year. Not too shabby!
Midstream energy stocks have been a graveyard for capital over the past several years. The JPMorgan Alerian MLP Index ETN (NYSE: AMJ), a popular ETN that is essentially an index fund for the sector, is down about 73% from its late 2014 highs. Chronic oversupply in the crude oil and natural gas markets have soured investor sentiment toward the sector to the point that even many of the blue chips are trading at prices that simply shouldn’t be possible.
To give a few examples, Magellan Midstream Partners (NYSE: MMP) and Enterprise Products Partners (NYSE: EPD) yield 9.32% and 9.36%, respectively, at current prices. These are generally considered to be the highest-quality names in the pipeline space, and they are trading at close to double-digit yields.
You have to be careful with MLPs as they can cause some tax headaches when purchased in an IRA. But if you’re looking for high yield in a beaten-down sector, it’s hard to do much better than midstream pipeline stocks. A million dollars invested in either Magellan or Enterprise would pay you a little over $93,000 per year, making pipelines one of the best sectors for dividends.
The COVID-19 bear market really was different. In a “normal” bear market, you expect the high-flying growth stocks to get slammed the hardest. But this time around, growth stocks held up fantastically well. But anything related to mortgages or rental real estate — generally considered to be recession resistant — got utterly devastated as both companies and individual renters had to seek forbearance deals.
Even after more than three months of price recover, the iShares Mortgage Real Estate Capped ETF (NYSE: REM) is down by about half and sports a dividend yield of 16.58%.
Even some of the larger blue chips are still trading at bargain basement prices. Annaly Capital Management (NYSE: NLY) yields 13.08% and AGNC Investment Corp (NYSE: AGNC) yields 11.04%.
On a million-dollar portfolio, you’d be looking at annual income of $110,000 to $165,800, making REITs one of the best sectors for dividends.
Sure, it comes with more risk. But it’s a lot better than the $14,700 you’d get in 30-year Treasurys.
• Money & Markets contributor Charles Sizemore specializes in income and retirement topics, and is a frequent guest on CNBC, Bloomberg and Fox Business.
Follow Charles on Twitter @CharlesSizemore.