By Carla Pasternak Interest rates near zero and record-low U.S. Treasury yields make finding good income investments a bit harder these days. Don't get me wrong. It's still possible to find attractive yields, but you need to know where to look. Some of my best ideas for my High-Yield Investing and High-Yield International newsletters have come thanks to going off the beaten path and looking at asset classes overlooked by others. For example, I've locked in nice returns in the past by adding offbeat securities such as bank loan funds, trust preferred shares and master limited partnerships to my portfolios. And luckily for income investors, I'm still finding plenty of fertile hunting grounds out there. Here are five spots where you can still find double-digit yields.
Business Development Companies
Business development companies, or BDCs, are a dream come true for high-yield investors. Many of these companies such as BlackRock Kelso Capital ( BKCC) yield double-digits and share prices are soaring. BDC yields are powered by making loans to small companies and passing along the earned income as distributions. They are similar to venture capital funds, giving retail investors the ability to profit from an area normally reserved for only the biggest investors. With bank credit still tight compared to a few years ago, BDCs are thriving as businesses have fewer options for financing. Like real estate investment trusts (REITs), BDCs must pay out at least 90% of their net investment income as dividends to avoid paying income taxes. That's why they can carry high yields. If you want to invest, look for business development companies that consistently raise dividends (or at least hold them steady) and can cover their dividend with investment income.
Municipal Bond Funds
When is a 7% yield really 10%? When it comes courtesy of municipal bond fund. Municipal bonds, or "munis," are bonds issued by state and local governments to fund highways, hospitals and other public projects. What makes munis (and the funds that hold them) attractive is that the interest they pay is exempt from federal income taxes, and sometimes state and local taxes too if the bond is issued by your local government. You'll be hard-pressed to find a muni bond fund that pays more than 10% as a headline yield. But what you should look at is the fund's taxable equivalent yield, which can exceed 10% for muni funds like Pioneer Municipal High Income ( MHI). The taxable equivalent yield is the yield you would need from a taxable investment (like a corporate bond) to match the tax exempt muni yield. (Read my article on "How to Hide from the Dividend Tax Increase.")