There is Yield to be Had...
December 6, 2025
With less than a month left in the year, it seems likely that 2025 will mark the third consecutive year of positive market returns, double digit returns at that. It is also very likely that the Fed will cut rates next week and that, in a few months, Trump will appoint a new Fed chair whom he hopes will carry out his wish to lower rates further. All this may create some new challenges for investors, already nervous about all the bubble conjecture and the large capital gains sitting unrealized in their portfolios.
After years of strong returns, investors may want to lighten up their equity holdings, protect some of their gains. Money market funds, formerly a reasonable place to park cash, will no longer be so attractive with rates heading towards 3%. Bonds may provide protection yet little income. Looking to find better yields already helped spur the effort to open up the private credit markets to individual investors and retirement accounts. While that somewhat opaque market served up higher income streams, it has also served up bad judgment and fraud that has cost investors millions.
Fortunately, there are other alternatives with much higher yields, better transparency, and active public markets… you just have to look a bit. Well-known telecom (e.g. AT&T, Verizon) and pharma (e.g. Merck, Abbvie) stocks have mostly missed the AI frenzy and are yielding as much as 7%. Less well-known are REIT’s (real estate investment trusts), some yielding over 13%. Also, ETF’s (exchange traded funds) that yield as much as 10% - funds with many securities invested in bonds, or focused on healthcare, or infrastructure, or invested more broadly in stocks and using options to hedge the risk. Yields can top 11%. There are energy companies and MLP’s (master limited partnerships) with yields over 7%. Finally, BDC’s (business development companies) have yields reaching as high as 12%. We are not recommending any in particular, just pointing out that there are many interesting and appealing options. [Full disclosure, Lava Wealth clients own many and have for years.] Time to get busy.
Why is the existence of such generous income producing securities less well-known? Often, these securities have smaller market caps (fewer shares outstanding and lower overall market value). As such, they are not really suitable for institutions, and advisors with large books of business, who want to be able to buy and sell large quantities without impacting a market. So they are mostly not new, just not discussed much.
How are these securities able to offer these generous payment streams? In almost all cases, the managers borrow additional funds, investing more in the notes, bonds, and equities they hold, creating more income. This makes them a riskier (not risky absolutely, just riskier) investment than a simple US Treasury bond or note. Over the years, Lava Wealth clients have been invested in just two of these kind of securities that suffered a precipitous collapse in value – one from bad management, the other from a kind of corporate slight of hand. In both cases, though, their continuing elevated income streams steadily reduced the capital losses to the point that we are approaching breakeven.
Yet that is just two out of many that we have invested in over many years. We have also enjoyed capital gains when the underlying securities increased in value even while paying their generous dividends. IMHO, the reward justifies the risk. A number of these securities make their payments monthly, rather than quarterly, so the income arrives more frequently. You can buy several, diversifying your holdings, redeploying some of your gains away from pure equities, harvesting the income streams.
Will these securities be vulnerable in the inevitable market retrenching that follows this long period of rising equity prices? Sure, their prices might decline though likely not as much as regular stocks … and they will continue making their distributions, offsetting at least some of the decline. Do a little work, talk to your advisors, find some more lucrative places to reinvest equity gains. Yes, they are somewhat riskier than US Treasuries… and much more lucrative. Even better, do it in your IRA’s - no capital gains taxes on the stock sales, no taxes on the income streams either. Don’t sit back with fingers crossed or hampered by fear – there are lots of options to consider… get busy.
On another front, several of you commented on the lack of an article link in the last edition… so few of you, in fact, that it just proved me correct about the relative lack of interest. Still, I am nothing if not determined (and, OK, possibly a bit stubborn) to share articles that I find interesting or amusing. Thus, the link below, a recent NY Times story about dedication to a craft on one hand and the subsequent saving it from almost certain extinction by an individual who turned his life upside down to do so. I found it delightful and so human in many respects…NOW READ IT!