Spotting Lucrative Current Yield Stocks

Kelly Green
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November 6, 2024
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Two weeks ago, I wrote to you about the power of compounding. I called out LyondellBasell (LYB) as one of my favorite stocks for using this long-term strategy.

In our online community, Kevin asked, “You also reference the opposite—a cash back strategy—have you written any letters on this topic?”

It all comes back to my two-pronged dividend strategy—build wealth and earn income. It’s a rather “boring” strategy, and I like it that way. Instead of watching the market—and stressing about what I see on the screen—I can be out doing the things I want to do while my money is working for me.

Bedrock Income stocks are those we can hold for years or even decades, like plastics giant LYB. These are perfect for the wealth-building part of your portfolio. Add the power of compounding with dividend reinvestment to grow wealth even faster.

Current Yield stocks are the section of the portfolio that Kevin asked about. We use these stocks to generate streams of income today. We also target higher yields and understand we are taking on slightly more risk for the higher yield.

Current Yield stocks aren’t positions you can just set and forget for years to come. We’ll only hold them for as long as it makes sense. Yes, this is the “shorter” term part of the portfolio. But even here, I expect to hold them for a few years.

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For shorter-term positions, I don’t recommend using dividend reinvestment. If your brokerage account is set to auto reinvest new positions, you’ll want to uncheck that box for these positions. When the company pays a dividend, that money will then be deposited into the “cash” portion of your account.

As always, my full list of Current Yield stocks is included with a subscription to Yield Shark, my premium research service.

Today, I will give you some selection tips and some of my favorite stocks to answer Kevin’s question.

Look for Alphabet Soup Stocks

During my 13+ years in the markets, I’ve come up with my own descriptors for pieces of the market. Alphabet soup stocks is one of them. I use it to include REITs, BDCs, and MLPs all in one group.

These types of companies are all structured to gain special tax treatment in exchange for passthrough status. This means they must pass through almost all their income to their unitholders (instead of shareholders).

The result is higher yields that work great for the Current Yield part of our portfolio. And as a group, they give you access to many different sectors of the market. Plus, they all trade on the market as easily as other stocks.

REITs, or real estate investment trusts, are probably the most common of the group. As the name implies, REITs are required to own, operate, or finance real estate. Just as real estate is varied, so are REITs. You can find REITs that specialize in different types of properties or properties within a certain industry.

BDCs, or business development companies, offer investors a participation path to smaller, hard-to-access companies. A BDC invests in a portfolio of small or distressed businesses. Beyond making an investment, a BDC must also provide management support. Many BDCs develop a specialty or niche area, and I tend to gravitate towards those with portfolios focused on technology or life sciences.

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MLPs, or master limited partnerships, are required to operate in the natural resources industries. This includes oil, gas, coal, timber, and transportation of commodities. Of the three groups, this one is taxed differently.

MLP unitholders are considered limited partners and taxed using a K-1 instead of a 1099. These are generally issued in March, which is frustrating for some. These investments can also trigger Unrelated Business Income Tax (UBIT) when held in a tax-advantaged account. Investors must stay alert to these filing obligations.

Some of My Favorites Right Now

Just being an “alphabet soup” stock doesn’t make it a good investment. But looking at these companies is a great place to start your search. From there, you want to make sure the company’s assets have long-term stability.

For example, when looking at real estate, I’m not bullish on office REITs and certain commercial REITs. I travel a lot, and even in big cities like Chicago and San Francisco, I’m astonished at the number of empty suites I’ve seen. Even with more companies enforcing back-to-the-office policies, I just don’t see the demand.

Instead, I like industrial and experiential real estate. This includes manufacturing areas, warehouses, and golf courses. I want real estate that companies or individuals will continue to spend their money supporting.

One example is VICI Properties (VICI). The company owns 93 experiential assets, including 54 gaming properties, four championship golf clubs, Chelsea Piers, and multiple Great Wolf Resorts just to name a few. The company owns the land and operates under long-term, triple-net leases. That ensures we will collect our distributions for many years to come. VICI has a yield of 5.5%.

Another favorite alphabet soup stock is Enterprise Products Partners (EPD). I have it officially marked as a Bedrock Income stock. In reality, it’s a great stock for either section of your portfolio due to its above-average yield of 7.2%.

So, the next time you’re looking to boost your income stream in the Current Yield part of your portfolio, I recommend checking out some of these specialized stocks.

For more income now, and in the future,