Investor Alert
Nicholas A. Vardy, CFA

Jan. 16, 2015, 12:34 p.m. EST

Profit from the coming income-investing panic of 2015

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 (BATS:REM)  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.

REM yields an impressive 14.52%, pays dividends monthly and charges a fee of 0.48% annually.

REM generated a total return of 16.77% in 2014, and boasts an annualized return of 10.6% over the past three years.

2. UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN — 17.45% Yield

The UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN  tracks the Wells Fargo Business Development Company index. The index mirrors the performance of all 26 Business Development Companies (BDCs) that are listed on the New York Stock Exchange or Nasdaq.

The BDC business model is to lend to small and mid-sized companies at high-yield equivalent rates while also at times taking equity stakes in them. Think of BDCs as "private equity light."

Based on a market-cap-weighted index, this ETN is highly concentrated with its top four holdings — American Capital Ltd. , Ares Capital Corp. (NAS:ARCC) , Prospect Capital Corp (NAS:PSEC)  and Apollo Investment Corp (NAS:AINV)  accounting for about 38% of its investments.

BDCL adds a twist to the BDC income theme. By leveraging your investment by two times, for every dollar of BDC stock it buys, BDCL borrows another dollar. With most BDCs paying relatively high dividends of 8%-9%, BDCL yields a whopping about twice that — making it one of the highest-yielding instruments you can find.

BDCL currently yields 17.45% and pays out dividends quarterly. It charges an annual fee of 0.85%.

BDCL generated a not-so-great total return of -16.04% in 2014. But that followed gains of 74.28% in 2012 and 32.6% in 2013, for a three-year average return of 19.09%.

3 . iShares Global Telecommunications ETF — 12.32% Yield

Launched in Nov 2001, the iShares Global Telecommunications ETF (PSE:IXP)  tracks the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund holds 46 stocks in its portfolio with the top-10 holdings making up close to 70% of the portfolio.

The top stocks in the ETF include familiar names like Verizon Communications Inc. (NYS:VZ) , AT&T Inc. (NYS:T)  and Vodafone Group Plc (NAS:VOD) , each with asset a weighting of 16.10%, 14.37% and 7.49%, respectively.

IXP boasts a trailing yield of 12.32% and pays out dividends quarterly.

The fund charges an expense ratio of 48 basis points a year.

As the most traditional of high-dividend plays among this group, IXP's current high yield comes with a significant asterisk.A big chunk of IXP's eye-popping headline yield stems not from dividends, but from a massive $6.37 per ETF pay out last June, which likely came from distribution of capital gains. Such a large distribution is unlikely to be repeated in the coming year. IXP's SEC yield is a much more modest 3.29%.

IXP generated a total return of -1.38% in 2014. Its three-year average return is 11.60%.

Disclsoure: Vardy owns IXP, BDCL and REM.

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