It’s becoming a difficult sell to ask many retail and income-oriented investors to buy Treasury notes and bonds now that the yield curve has inverted and long-term yields are at historic lows. Quite simply, the U.S. Treasury bond and government agency bond markets have become rather unattractive for new money to go into in 2019. As of the start of September 2019, there was nearly $22.5 trillion worth of total public debt outstanding that the U.S. government owns.

Many investors absolutely must have income in their portfolios. This may be to help supplement their retirement needs, or it may be part of a long-term investing strategy to keep reinvesting interest payments or dividends throughout the ups and downs of the market cycles for total return. The U.S. recovery is now well over 10 years old, but this also has been the weakest post-war recovery.

Investors had to deal with nearly a decade of short-term interest rates near zero percent. That drove them to stocks, but now that the economic growth is starting to falter, some investors will have concerns about chasing stocks into a downturn.

To look for bond income internationally is becoming impossible. There is close to $15 trillion worth of sovereign debt in the world that comes with negative bond yields. That means bond buyers in Europe and Japan are actually losing money just to hold the safety of a full return of their capital upon maturity. That seems savage enough, but trillions of dollars worth of government and other debt around the world pay almost zero in interest.

The yield on the 10-year Treasury note was last seen down at 1.455%, almost 40 basis points less than the 1.94% yield of the 30-year Treasury’s “long bond.” These will not only keep you from being rich, but there are still taxes that have to be factored in for many investors in need of income.

There are multiple alternative avenues for traditional bond and income investors to chase yields and income. None of these holds the traditional guarantee of a sovereign bond, and most will not be immune to selling pressure if the next recession is even remotely close to what was seen in the Great Recession.

24/7 Wall St. has put together a list of eight alternatives for Treasury and traditional bonds investors who must have income to help supplement their lives. This is meant to be a go-to guide of alternatives as the market stands at the start of September 2019. These are certainly not the only alternatives and they are not ranked or in any specific order at all. All these alternatives are easily accessible and can be researched by any level of investor today.

1. The S&P 500 and the Dow

It’s hard to imagine, but the Dow Jones industrial average and the S&P 500 are offering better overall yields than long-term Treasuries. That is not always the case, but most investors assume that over the course of a decade or so that even the worst timing on the initial purchases will be higher in the years ahead. One keep-it-simple strategy at this point is to buy mutual funds or exchange-traded funds (ETFs) that directly track the Dow or the S&P 500. They always tend to outperform bonds in the long run, and major sell-offs allow investors to buy more or reinvest their dividends at lower prices.

The S&P 500 and Dow now handily outyield the 10-year Treasury note, and most seem to outyield even the 30-year. Of the 30 Dow stocks, only six yield less than 1.50%: Apple, Microsoft, American Express, Walt Disney, Nike and Visa. Exactly half of the 30 Dow stocks now yield over 2.5%, and 10 of them have yields ranging from 3.2% to over 5.0%.

The median yield of all S&P 500 stocks was last seen at 1.96%. Excluding the 80 or so S&P 500 companies that pay no dividend at all, the median dividend yield of the rest is about 2.3%.

2. Defensive Dividend Stocks in Utilities and Consumer Products

Some investors just do not want the risks of health care, technology, industrials and other cyclical stocks in a portfolio in which they must depend on income via dividends or interest payments. It turns out that water, gas and electric utilities generally pay higher dividend yields than most intermediate and long-term Treasuries at this point.

The same is true for consumer product giants like Procter & Gamble, Johnson & Johnson, Colgate-Palmolive, Kimberly-Clark and Clorox. Each of these companies comes with its own risks, but some of them have proven to be as close to recession-proof as you can imagine. And with average yields well into the 2% range, investors can still find yields above 3% from a whole host of multibillion-dollar leaders in these segments. Yields of almost 3% also can be found from the likes of Coca-Cola and PepsiCo.

3. Investment-Grade Corporate Bonds

U.S. investors can purchase corporate bonds of major companies at yields that are higher than Treasury notes and bonds. These yields generally will be 30 to 100 basis points (0.3% to 1.0%) higher in yield than their closest Treasury note or bond. The trick here is that these need to be U.S. corporations to avoid near-zero or negative yields. Reuters cited Tradeweb data as recently as September 2, 2019, that almost half of the €3.4 trillion worth of euro investment-grade corporate bonds on the Tradeweb system were at a negative yield (versus only about 12% that were negative back in January).

Dozens and dozens of open-end and closed-end mutual funds track corporate bonds to avoid the risk of unluckily choosing the one corporation that will unexpectedly turn way south. There are also multiple corporate bond ETFs with yields that are handily higher than Treasury notes and bonds.

4. Municipal Bonds

Buying tax-free municipal bonds has been a tradition among investors for decades. These are generally free from federal income taxes, and they are issued by states, counties, cities and many local tax/government entities. There are too many types of muni-bonds to name quickly, but investors now can find yields that are close to, the same as, or even higher than Treasury yields without having to pay federal taxes on the interest.

There are some considerations when buying individual munis. The catch is that some are not tax-free and some have large discounts or premiums to face value (par) that may lower how attractive they are. Another consideration is that investors in the lowest tax brackets just don’t get the same relative advantage as tax-free investors who are in the top tax brackets.

According to the MSRB, there is roughly $3.8 trillion worth of municipal bonds outstanding in the United States. There are dozens of single-state and national closed-end muni funds run by Nuveen and other fund managers that have yields of 3% to above 4%.

5. Master Limited Partnerships

The world of master limited partnerships (MLPs) as infrastructure investments in the oil and gas sector has changed quite a bit over the past two decades. Quite simply, these are entities that pay out their income and also use a return of capital to create a yield-equivalent payment rather than a true dividend. Investors pay tax on the income portion of each distribution, but the return of capital component is generally expected to be tax free. Even in the ups and downs of the oil market, many MLPs have been able to keep increasing their distributions.
While these were extremely popular in years past, the prices of MLPs in general have suffered with the price of energy in recent years. It is rather easy to find yield equivalents of 5%, 6% and higher in this group, but the price drops have burned many investors over the years. Rather than taking on individual risks about the infrastructure operation of just one partnership, and to avoid very difficult tax filings, there are billions of dollars worth of closed-end funds tracking MLPs, and there are ETF options as well.

6. Dividend Aristocrats (And Then Some)

Everyone knows income investors love dividends, but companies that grow their dividends year after year tend to be rewarded more or are considered safer than companies that overextend themselves by paying out too much income in the form of dividends. An index called the S&P 500 Dividend Aristocrats is made up of U.S. companies in the S&P 500 index that have raised their dividends for a minimum of 25 years in a row. These companies have proven, even during the Great Recession, that they know how to keep dividend payments going through good times and bad. After all, there have been three U.S. recessions since 1990.

As of July 2019, 57 were companies listed as “aristocrats” and the yield is currently close to 2%. Assuming equity prices rise over time as they always have, the future effective yield at any given day’s purchase price will be higher as these dividends are raised. To go one step further, there is also a smaller list of companies that have raised their dividends for at least 50 consecutive years despite the having been seven U.S. recessions since 1969.

7. Real Estate Investment Trusts

Real estate investment trusts, or REITs, have to pay out a minimum of 90% of their income to their holders to avoid double-taxation. These generally are expected to make money as landlords by owning and leasing real estate, but there are many types of REITs, such as mortgage-backed securities REITs, which earn income investing in mortgages. There are also apartment REITs, senior care and health care REITs, and REITS tied to leasing offices and facilities to government-run entities.

REITs often pay higher yields than other fixed-income markets. They may come with risks that investors do not understand or would want to avoid. In the cannibalization of malls and shopping centers as e-commerce has risen, how well can investors expect landlords to retailers will fair in the next recession? And how well would hospital and other health care REITs do if the U.S. health care system is socialized?

8. Preferred Securities

Some investors want income without the volatility of the stock market, and that can lead investors to preferred shares rather than common shares. These generally come with fixed rates, and the preferred shares are not last in line like common shareholders in the capital structure (in case of bankruptcy or liquidation). While they are not considered as safe as corporate bonds, investors can still find yields of 5% or better here without the perceived risks of common stocks.

While many banks had to suspend common dividends, suspending a preferred dividend generally is considered the same as a corporate default. The iShares Preferred and Income Securities ETF yields almost 5.5% on last look, and just about every large bank has individual preferred shares that should offer high yields.

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