Etf Investments
The S&P 500 has been flat for almost 9 years. The Index has been essentially flat for the better part of a decade.
Clearly, just investing in the S&P 500 index would have provided abysmal returns. It’s returns like these that cause a fundamental shift in investor sentiment. A shift I believe we can all profit from.
The impact of horrible returns.
Life is full of unintended consequences. We see it every day. Laws passed by good-intentioned government officials end up hurting the very people they were expected to protect. Just look at the Alternative Minimum Tax or AMT. This tax law was passed to prevent the richest of the rich from avoiding taxes. Now millions of middle-income Americans are caught in its grip. (You’d think congress could fix this problem in 10 minutes.)
The market’s not immune from unintended consequences.
With index Investments providing such poor returns, investors are frustrated. They’re starting to jettison index funds in exchange for better investments. These investors are seeking a true return. A cash on cash return. With a realization that the market doesn’t always trend up, investment portfolios are shifting. Investors need to do something. And that something is to invest for yield. Investment yield is the cash returned to an investor from a particular investment.
Bonds are the most common and widely held provider of yield. For example, 10 year Treasury Notes backed by the US Government are currently yielding 3.8%. So, for every $100 invested you get $3.80 every year. At the end of the 10 years you also get all of your principal back.
But there’s a problem.
The yield a bond pays doesn’t take into account the impact of inflation. That’s right. When you buy a bond you are in essence making a loan. The yield on that loan never changes. You get the same amount . . . year in and year out.
This is where inflation rears its nasty head. I don’t know if you noticed but prices are going up. I remember when gas cost less than 99 cents. Now I’m paying $3.25 a gallon to fill my tank. Everyone’s seeing the same thing in food costs. Just scan the news for riots. Riots over the rising cost of food. My grandfather (who lived through the depression) pointed out to me that apples used to cost $1 per pound not too long ago . . . now he pays $1.30. That’s a 30% increase, and that’s inflation.
Inflation is everywhere. It destroys the purchasing power of your hard earned dollar. And those fixed yields bonds are paying also suffer from the impact of inflation.
There is a way to avoid this problem.
Bonds might be the most popular investment with yield. But there are a number of other options. Stocks that pay dividends, REITs, Master Limited Partnerships, and a host of options strategies just to name a few.
Why would these be better than bonds?
Two reasons. First, bond yields are tied to interest rates. When inflation becomes a significant problem in the economy, the best way to deal with it is by raising interest rates. Climbing interest rates make Bond Investments fall in value. So when the Federal Reserve starts raising interest rates to battle inflation, the value of your bonds are going to plummet.
Longer term, other securities have the ability to increase payouts. Let me give you an example. Simon Property Group (SPG) a REIT which owns malls all over the US paid a healthy dividend of just over $2.00 per share in 2000. In just the last 12 months the company has paid its shareholders over $3.42. That’s roughly a 71% increase in the dividend. Increases like that help battle back the impact of inflation.
I happen to like the REIT industry right now for its yield. And investors who’ve been burned by the market will start to hunt for yield.
The REIT industry consistently pays nice dividends. Investors benefit from their REITs’ tax advantaged status. You can also slice and dice your REIT investments. What do I mean by that? REITs can be broken down by building type (apartments, commercial, hospitals, storage units, etc.) or by geography. You can also divide them up by size, leverage, or by financial performance.
Unfortunately it’s a little too complicated to get into here, but believe me, REITS can be structured in hundreds of ways. What I do is cheat. I don’t try to slice and dice my investment in the industry. Instead, I buy a big basket of REITS and average out my returns.
This diversification gives me great exposure to the industry while limiting my risk. The basket of REITs I have in my portfolio is the iShares Dow Jones US Real Estate (IYR). This REIT ETF is a great way to collect a nice yield while protecting yourself from the impact of inflation
Brian Mikes is the editor of the Dynamic Wealth Report, a free investment newsletter that offers investment ideas and news you can’t get from the mainstream investment press. Brian and his team bring decades of Wall Street and Silicon Valley experience to help you discover profitable trading ideas you can use today.
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