In a zero percent interest rate environment, everyone has become yield hungry – retirees especially. They must earn a satisfactory return on their funds, but that’s very difficult to achieve in today’s economic climate. On the one hand, they can go out and buy a world leader like Microsoft or Intel and earn an annual dividend paycheck roughly in the area of 3.5%. But that’s too low to live on. On the other hand, they can reach out for junk bonds, earning them anywhere in the area of 12% to as high as 18%. But these issues aren’t safe.. so retirees might end up suffering capital losses by investing in them. I believe that the sweet spot should be somewhere in the area of 6% to 9%. These types of returns are both satisfactory and don’t come with sleepless nights. I have detailed below three interesting opportunities that are still off-the-beaten-path.
Opportunity #1: A boring energy company
Energy Transfer Partners LP (NYSE:ETP) is the most dominant pipeline operator out there. Energy Transfer is a huge name in oil transportation. It has $15.5 billion in assets and a market cap over $10 billion. ETP wholly or partially owns and operates 23,500 miles of natural gas and natural gas liquids pipelines in the Northeast, Midwest, and Gulf Coast regions of the U.S. It also owns natural gas storage and distribution terminals and natural gas processing facilities. Nearly half of its cash flow comes from owning the largest natural gas pipeline system of its kind in the country.
Energy Transfer Partners LP (NYSE:ETP) isn’t incorporated as a company but as a master limited partnership (MLP). MLPs don’t pay taxes, as long as they generate 90% of their revenue from sources the IRS calls “qualified.” The most important thing income investors should know about MLPs is that they are required to pay out most of their earnings in the form of dividends and other shareholder benefits. The combination of this commitment with a massive generation of cash, results in a healthy 7.5% dividend yield to shareholders.
Opportunity #2: Make the IRS pay you
Government Properties Income Trust (NYSE:GOV) is a business that rents buildings it owns to the government.
The IRS is GOV’s biggest tenant (measured by square footage). The next-biggest tenant is U.S. Customs & Immigration. These two make up over 20% of GOV’s rental income. The next biggest in terms of rental income is the Department of Justice. None of these “businesses” is going out of business. These departments of the federal government will be around a decade from now… and a century from now.
GOV buys properties. It rents them out to government entities. And smartly, it pays no income taxes on the rent it earns because Government Properties Income Trust (NYSE:GOV) is a real estate investment trust (REIT). As a REIT, it has a special tax status, where it doesn’t have to pay income taxes on its rent. Instead, it passes along nearly all the rent it earns to you, in the form of dividends. As long as it passes its rent along to you, it can keep this special tax status. At today’s share price, GOV sports a high and steady dividend of 6.6%.
Opportunity #3: Bet on the spread
Annaly Capital Management, Inc. (NYSE:NLY) is a mortgage real estate investment trust. As such, the company owns, manages and finances a portfolio of real-estate related investments. If it sounds boring to you… that’s OK. Because Annaly elected to be taxed as a REIT, it’s obligated to pay 90% of its net income back to its shareholders in the form of dividends. Now it’s getting more interesting. Annaly ‘s business model is simple. It borrows money at low interest rates (thanks to the Federal Reserve) and invests it at a higher interest rate in government-guaranteed mortgages from Fannie Mae and Freddie Mac.
The difference between the rates Annaly Capital Management, Inc. (NYSE:NLY) pays to borrow and the ones it collects from its investments is called the “interest-rate spread.” Annaly has an interest rate spread of 2%. At six times leverage – or six times more debt than equity – that’s roughly a 12% return on its money. And that’s what allows it to pay out such large dividends. At a current share price of $15.20, Annaly offers the investor a hefty 12% dividend yield.
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Shmulik Karpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Buy These 3 Creative Dividend Opportunities originally appeared on Fool.com.
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