Safe High-Yield Investments
Owning an investment that pays a safe high yield helps greatly with paying for your retirement expenses, generating an extra source of income, and/or having extra cash for an emergency. In other words, these investments can supply safe, reliable, and growing income.
However, once you’ve determined the goal for your high-yield investment, the fun part begins: finding such an investment in the first place.
There are many investments that offer a high yield but are not considered safe, which can be hard to identify. This is why I will showcase what makes an investment have a high yield, how to ensure that an investment’s income source is safe, what the risks are, and more. I will also list my favorite safe high-yield investments, some of which are yielding more than 10%.
What Are High-Yield Investments?
An investment’s yield must be compared to a benchmark to determine if it would be labeled a high-yield investment. The best benchmark to use is 10-year U.S. Treasury notes. Treasury notes are debt products that are offered by the U.S. government at a fixed interest rate, and they have maturities of one to 10 years.
The way that Treasury notes work is that the government issues one and promises to pay a fixed interest rate to investors. At the end of the maturity date, the capital that was invested is returned. This is how the government borrows money, while investors are rewarded at the same time.
The 10-year Treasury note is the one used as a benchmark, because it offers the highest interest rate, due to its longer maturity date. The investment is considered safe because the U.S. government will still be around in 10 years, making it highly probable that investors will receive their income and capital investment.
The yield offered on the 10-year treasury note is 2.36%; anything above that marks a high-yield investment.
How to Determine If a High Yield on an Investment Is Safe
There are a few things that should be considered before capital is deployed into a high-yielding investment. After all, the more knowledge you have at the start, the better. Below are the top three ways to determine if a company is a safe high-yield investment.
1. How Much Is the Company Paying as Income?
The most important information about any investment that is paying out income is how much it is generating in earnings and how much is being paid out. This is so important because, if the company is paying out more than it earns, it could cause the business to consider cutting or eliminating the payout. In contrast, a company earning more than it pays out is much safer, especially if that income continues to increase.
So, how do you learn about a company’s earnings and payout? By taking a look at its payout ratio. In this case, the focus should be solely on businesses that have a ratio of less than 100%. An example of an acceptable payout ratio would be 30%, or $0.30 paid to investors for every $1.00 in earnings (the company keeps the other 70%).
2. Earnings Trend
Earnings trends will help determine the safety of the dividend and the volatility of the investment. Trends impact the safety of the dividend because a company with growing earnings has a higher probability of paying a steady income to investors, not to mention the possibility of continued growth. In contrast, companies with huge swings in their earnings could change their dividend policy negatively. Companies that have steady, predicable income streams should be the focus here.
The trends in earnings also influence the volatility of the investment, because constant earnings mean that the investment price should not see many fluctuations. This would add to the concept of the preservation of the capital investment. Over the long term, the benefit would be a higher total return on an income basis and a capital gain basis, which should impact the bottom line positively.
3. Future Growth (Acquisitions)
Following the payout ratio and earnings, the next important aspect of any business is its future growth potential. This matters, because this is what will drive the stock price—and hopefully the dividend—higher. This would benefit you as the investor over the long term.
So, how do you determine if the business has future growth? Well first, take a look at the company’s history and current status. For instance, see if there have been any recent acquisitions, be it of a direct competitor or another business in another sector, that the purchase now gives the company exposure to.
Buying the competition means that the company’s market share in that segment should increase, and its operating costs should decrease. This also helps to improve the margins of the business.
An acquisition in a totally new market should provide growth at a higher rate than what the current business is offering. This, of course, means revenue should increase as well.
Both scenarios reflect positively on a company’s financial statements. More importantly, they should lead the share price trading higher, providing the earnings needed for the dividend.
With all this said, here are my picks for the best safe high-yield investments for 2017.
List of High-Return Investments
| Company Name | Ticker | Price | Yield |
| AGNC Investment Corp | AGNC | $20.05 | 10.77% |
| Southern Co | SO | $50.03 | 4.64% |
| AT&T Inc. | T | $38.57 | 5.08% |
| Gaming and Leisure Properties Inc | GLPI | $35.28 | 7.03% |
| Pembina Pipeline Corp | PBA | $32.22 | 4.73% |
1. AGNC Investment Corp
AGNC Investment Corp (NASDAQ:AGNC) is a real estate company which invests in mortgage-backed securities. These include both residential mortgage securities and collateralized mortgage obligations (CMOs), which are guaranteed by government-sponsored companies.
Making investment decisions can be quite difficult, especially for retail investors, when it comes to mortgage backed securities. That’s why the great thing about an ownership stake in AGNC Investment Corp is that a professional management team makes the decisions regarding allocation of capital. They will also alter the portfolio to match changes in the marketplace, which is another bonus.
AGNC stock is structured as a real estate investment trust (REIT), which means that at least 90% of its income is paid out to investors. The high payout is required because of the tax benefits that the business enjoys. But what makes AGNC even more unique is that it delivers a high yield, with income paid out on a monthly basis.
Another reason to consider AGNC stock would be its cheap valuation, based on the price-to-earnings ratio (P/E) ratio. The current ratio for AGNC stock is 4.6 times, compared to 12.7 times for its industry. This means that $4.60 would be paid for each dollar of earnings, while the average payout of its peers is $12.70.
For AGNC Investment Corp to move higher and in line with others in the industry, earnings growth is necessary. Its gross margins, operating margins, and profit margins are all higher than the industry average, which signals to the markets that management knows what it’s doing. However, said markets continue to ignore AHNC, one of the best high-yield investment funds.
The margins should continue to move higher, because interest rates are a key business indicator. Since 2015, interest rates in the U.S. have been increasing and show no signs of stopping. This increase should benefit the top and bottom lines of the balance sheet, the share price, and the dividend payment. That’s why AGNC Investment Corp is one of my favorite best high-yield investment trusts.
2. Southern Co
Southern Co (NYSE:SO) is a company that distributes electricity and natural gas to other companies, as well as other wholesale gas services.
Southern Co is one of the low-risk, high-yield investments, in part due to its daily volatility. This is reflected in its beta of 0.13, compared to 1.00 for the overall market. So, if the market fell by one percent, SO stock should fall by 0.13% on average. This helps to preserve the capital investment.
SO stock would also be considered low-risk because it provides services that are needed every day by its end consumers, which makes for steady earnings. The stock is protected from inflation as well, since the cost of running the business is passed along to the end consumer. This means that inflation is not a problem for Southern Co, and its margins remain steady and strong.
Lastly, there is a low probability of Southern Co facing new competition, due to high barriers of entry. The heavy requirements to operate in this market segment, such as the large amount of capital needed for the network and infrastructure, as well as the regulations, are simply too much for most people.
All this benefits shareholders, as evidenced by the dividends. SO stock is a high-yielding investment, which rewards investors with a growing payout. The dividend has seen an increase over the past 15 years and it can continue to do so, making it worth considering part of your high-yield investment ideas.
3. AT&T Inc.
AT&T Inc. (NYSE:T) is a company with a presence around the world. The business is engaged in providing communications and entertainment services to customers.
T stock is a great high-yield investment because of its long history of rewarding shareholders. The aforementioned high yield that has been growing over the past 32 consecutive years.
With such an investment, being a long-term investor and showing patience is going to benefit your bottom line. This is because the average yield on the initial purchase price is only going to increase over time. This is provided that the dividend continues to grow, which is likely, given the conservative payout ratio.
AT&T has also engaged in a share repurchase program. This is when the company purchases its own shares, leaving fewer available on the market. As a result, each remaining share becomes worth a larger percentage of the business. (Source: “AT&T Approves New 300 Million Share Repurchase Authorization,” AT&T Inc., March 31, 2014.)
This move also signals two things to the market. The first is that the shares are undervalued, based on an internal assessment. The second is that, based on future growth, management believes that the shares will be trading higher in the future.
Future growth is going to be coming from two major acquisitions. The first is the $85.4 billion purchase of Time Warner Inc (NYSE:TWX), announced in 2016 (but yet to be completed). This allowed for AT&T to expand its services in areas such as television, wireless networks, and broadband services. As explained earlier, acquisitions such as this should result in expenses being reduced and revenue increasing. (Source: “AT&T to Acquire Time Warner,” AT&T Inc. October 22, 2016.)
In 2015, an acquisition of DirecTV was completed. This purchase was made to once again increase the number of customers and reduce overall operating costs by offering packed bundles and reducing the company’s overall headcount. (Source: “AT&T Completes Acquisition of DIRECTV,” AT&T Inc., July 24, 2015.)
4. Gaming and Leisure Properties Inc
Gaming and Leisure Properties Inc (NASDAQ:GLPI) is a company that is focused on acquiring, financing, and owning real estate. But not just any real estate is looked at; the company only cares for properties around tourist areas that could support a casino. More specifically, the focus is on the likes of Hollywood, Baton Rouge, and Nevada.
Gaming and Leisure Properties enjoys strong margins, which are more than double the industry average. As a result, shareholders have been rewarded with a with a quarterly dividend that has been growing alongside earnings.
There has also been the occasional special dividend when there is surplus cash. This is paid in addition to the quarterly payment and adds to the total return of the investment. One was in 2014 for $11.84 per share, compared to the “normal” $0.52 per share quarterly dividend at the time. In other words, Gaming and Leisure Properties is not shy about rewarding shareholders when the opportunity arises.
This is a great investment opportunity with a high yield, adding to an investor’s bottom line to help with their current or future income needs.
5. Pembina Pipeline Corp
Pembina Pipeline Corp (NYSE:PBA) is an energy transportation business with assets across North America. It delivers crude oil and natural gas to various destinations around the U.S. and Canada.
The oil and natural gas industry tends to be very volatile and moves with the price of oil, but this has no effect on PBA stock. Since the business is focused on transportation, it is not involved with—nor impacted by—oil’s price or drilling operations. Rather, it profits from the businesses that do the drilling.
PBA stock has a beta of 0.72, showing its low volatility. Therefore, the daily price movement will be only minimally affected, compared to the overall market. This also means that the stock price and invested capital would be preserved in a down market.
Pembina Pipeline Corp pays its growing dividend on a monthly basis. The company tends to review its dividend policy every April. The yield on PBA stock is 4.74% and, as long as the trend of dividend growth continues, there is the possibility of this yield increasing, based on the initial purchase price.