By Nicholas A. Vardy, CFA
Income investors have had a tough time since 2009.
The Fed's zero-interest-rate policy ("ZIRP") has punished savers and retirees who depend on their accumulated savings to eke out income from their hard-earned investments. So it's no surprise that over the past few years, these same retirees have piled into income investments to generate regular high-single-digit, or even double-digit, percentage income.
After all, hearing the metaphorical cash register of regular returns ring every month or quarter even in the face of Mr. Market's relentless mood swings offered some semblance of stability.
Alas, the slow and steady drumbeat of regular, steady returns from relatively stable income investments of all stripes is set to face a huge challenge in 2015.
Recall that in May 2013 — the month Ben Bernanke introduced the word "tapering" into the world's financial lexicon — caused the to bottom drop out from under virtually all previously "safe" income investments.
Even if you held a diversified portfolio of, say, U.S. Real Estate Income Trusts (REITs) that boasted double-digit yields, you saw your position tumbled by as much as 20%.
And as Mark Twain observed, "History never repeats itself, but it does rhyme."
With the Fed widely expected to raise interest rates some time in 2015, I predict investors will see another interest-rate-rise-related selloff in income investments, similar to the bloodbath they endured in 2013.
Double -digit yields in a zero-interest-rate world
That said, I find investments that generate high income, month after month, year after year a compelling proposition. Adding to these positions following each inevitable market hiccup has been a profitable, contrarian strategy over the past few years. And thanks to the high income generated by each holding, a portfolio of about 10 these diverse strategies I run for my clients at my investment advisory firm, Global Guru Capital has yet to have down year.
With that, here are three of my favorite, top-performing, double-digit-yielding income investments.
1 . iShares Mortgage Real Estate Capped ETF — 14.52% Yield
iShares Mortgage Real Estate Capped ETF /zigman2/quotes/203780198/composite REM +0.95% tracks the FTSE NAREIT All Mortgage Capped Index.
The index is weighted by market cap and screens constituents for size and liquidity. Most of REM's holdings are in medium- and small-cap mortgage real-estate investment trusts.
REM has large allocations to two giant mortgage REITs, Annaly Capital Management (16.95%) and American Capital Agency (12.94%).
Unlike equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that engage in arbitrage on the spread between the short-term interest rate and income from mortgage-backed securities.
That's why mortgage REITs are very susceptible to rising interest-rate risk. Even small upticks in the short-term rate can have a significant impact on these firms' profitability. Several Mortgage REITs have cut their distributions and have performed poorly during past rising-rate environments.