Annual Yieldfest:

This is the time of year when we traditionally update our readers on the best available income-oriented investment options. We focus on this aspect of investing as it’s central to our Fortress Financial Plan approach and especially beneficial during market turbulence.

Special thanks to Andrew Tanzer for interviewing me for the fourth time in Kiplinger’s annual Yieldfest article. A link to the full article is included at the bottom of the newsletter.

Below is a quick overview of the income-oriented options for maximizing portfolio yields described in the Yieldfest article.

Please note that nothing in this newsletter should be considered investment advice. Always conduct your own due diligence or consult with a financial advisor before implementing any strategies discussed here.

Short-Term Funds: 4% to 5%

There’s no shortage of options where you can keep your cash safe and still earn a respectable return during these uncertain times. Money market and short-term treasury funds are among the best-known "safe haven" options. Keep in mind that your real yield, once you adjust for inflation of over 3% and taxes, can be flat or even negative. So please don’t overdo it with these “safe haven” options as this can negatively impact you in the long run!

At Capital Squared, we prefer individual treasury bonds which allow us to protect our clients’ cash needs more effectively and minimize taxes (as treasury bonds are exempt from state income tax).

Municipal Bonds: 5% to 6% (est. tax-equivalent yield)

For investors in higher tax brackets, municipal bonds offer a smart option. You don’t pay federal or state income taxes as long as you invest in bonds issued by your home state. While municipal bonds generally have much lower default rates than corporate bonds, it’s important to remember that bonds from certain states can be more volatile during market disruptions. For that reason, municipal bonds are best suited for investors who plan to hold them to maturity.

Investment-Grade Bonds: 4% to 6%

Investment-grade corporate bonds are a core piece of our Fortress Financial Plan approach. Options in this category range from straightforward bond funds to more sophisticated total return strategies designed to perform in varying economic environments. Selectivity is key here. Your investment results can vary widely based on what you choose.

High-Yield Taxable Bonds: 5% to 8%

High-yield or "junk" bonds can significantly boost the yield of your portfolio. But a word of caution. Unless you're prepared to conduct extensive due diligence, this is an area best left to professionals. High-yield bonds can behave much like stocks during turbulent markets, meaning your returns can swing dramatically. Ideally, these investments should be kept in tax-deferred accounts to avoid unnecessary tax drag.

Dividend Stocks: 3% to 6%

Dividend-paying stocks not only provide ongoing income, but they also help keep your portfolio more stable. Many dividend payers are mature companies with sustainable cash flows and able to weather even the harshest market environments. However, be careful if you decide to chase unusually high dividends.

Always ask - why is company XYZ paying an 8% dividend when the average is closer to 3.5%? This mindset can help you avoid some of the most common income-investing pitfalls.

Real Estate Investment Trusts (REITs): 4% to 6%

REITs tend to offer higher income than regular dividend-paying stocks. That’s because they are required to distribute at least 90% of their taxable income each year. They can be an excellent tool for a diversified portfolio, but remember, REITs are sensitive to interest rate changes due to their higher debt levels. So they shouldn’t be considered particularly safe investment options.

Business Development Companies (BDCs): 10% to 13%

BDCs specialize in lending to small and midsize private businesses. They borrow at lower rates and lend at higher ones to firms that typically can’t access traditional bank financing. While they can offer impressive yields, BDCs are higher-risk investments. It’s critical to be selective. BDCs can enhance returns in a diversified portfolio, but they are unlikely to serve as a core holding for most investors.

Closed-End Funds (CEFs): 5% to 14%

Certain income-oriented CEFs borrow money to build portfolios of stocks or bonds, often corporate and municipal bonds. Leverage can amplify returns, but it can also magnify losses. CEFs require deep expertise and rigorous due diligence. This is not a space for casual investing. Even in favorable conditions, CEFs should generally make up only a modest slice of a well-diversified portfolio.

I hope you’ve learned something new!