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Best Income Investment Alternatives to Dividend Stocks

Before investing your hard-earned cash, knowing know where and how is a crucial decision that you’ve got to make. While dividend stock may be a great source of income with fewer risks, it requires time for you to earn anything substantial. The yields from dividend stock are also very low (2%-3%). So, to generate any meaningful income, you will require a lot of capital. If for instance, you decide to have a dividend portfolio of $300,000 that you expect to yield you 3%, and then you will only have earned $9,000 a year. That is not worth the investment risk. If you are not that patient, then you better invest in something a lot riskier but with the ability to build you fortune faster.

Other Investments apart from Dividend Yield Stocks that you as an investor would consider include;


These are companies that come together to form a group. Utility companies are of two categories:

  • Depending on the services offered. It may be water, natural gas or electricity
  • Regulation; The local municipality may regulate regulation- a company or not. Those utilities that are free from regulation by the municipality normally manage to rise faster. However, they do not receive the monopoly protection like a regulated utility.

Utility Companies’ shares are popular with dividends investors because they provide consistent payments. Also, they carry small risks. They are a few companies and their shares trade as high as the market can allow since they are somehow protected.

Despite all the glory towards utility companies, they have no much influence on the interest rates. What it means is that their cash flow and dividends rarely change. The shares may tend to fall if the rates are too high. However, the drop is not a big threat if the rates rise gradually. This aspect, therefore, renders this type of investment more secure and also high yielding.

Dividend Growth Stocks

It is the annual percentage rate of growth that a special stock dividend usually undergoes over time. Growth stocks tend to outperform the market and give investors higher earnings. However, they are riskier, and a shareholder can quickly go bankrupt.

Dividend Yielding Stocks Vs Dividend Growth Stocks

Interest rates are on the rising trajectory. In a bull market, when interest rates tend to rise, the demand for property (in real estate) goes down. Take a scenario whereby the mortgage rate of 30 years increases from 5%-8%. Few people will want to own homes. The growth stock will outperform dividend-yielding stock. In a bear market, on the other hand, the interest rates go down, and the demand for property increases. This way, the dividend yielding stock outperforms.

In dividend growth stock, there are significant movements, and that raises the level of risk. They are mainly recommended for the young folks as they have more time to make up for the losses they may incur. However, when they move in your favor, you stand to benefit a lot. But that is only if you have a large capital portfolio. If you don’t, you have no choice but to invest elsewhere. Do not depend on one form of investment. Split your capital into several portions and commit to different portfolios. To ensure you have a steady stream of income, a wise investor would diversify. If you want to generate lower taxed income, which carries less risk, then the dividend stock is the way to go. However, they work best with old investors.

High-Yielding Bonds

This type of stock pays very high dividends such that one may be tempted to think it is easy. Before committing your cash to high yielding bonds, you have to consider these two important things into consideration:

  • You need to find out if the high dividend yield depicts a poor price performance. Suppose the annual price per share dividend is $0.25 with the price of $15 for each share. This gives a dividend yield that is under two percent. What if the price of a share goes down to $2.50 per share? The dividend yields shoot to 10%. Eight one of the 188 stocks trading on New York Securities Exchange offering a dividend of more than 8% had their stock fall by more than 8%. The top 10 stocks on the list posted a loss of more than 20%. An unexpected price drop means that the company is undergoing crises. The solution to the constraint is only to cut the dividends.
  • Also, you should be careful with high-yielding stocks because of the inconsistency in dividends paid. They pay almost everything as dividends and leave with very minute for growth. It means, therefore, that they are always in search of cash to remain in operation. To raise more, they will deliberately cut the dividends of the shareholders. That result in more profits in this quarter and less in the other. So, their payments are unpredictable.

Despite the risks associated with them, some of the companies perform very well. They can pay high dividends while still catering for the future of the enterprise.

Monthly Dividend Stocks

There is no better feel than the ability to collect you dividend check every end month. This is a very nice plan for those who rely solely on such type of investment for a living. For those who are not patient enough, they may think about this option. It would work better also for beginners so they can see results faster and gain the momentum to invest more.

Municipal Bonds

Seemingly, bonds from the local governments or the states are not high yielding. But, the bonds do get exempted from taxes from the state, and they do add up. The primary beneficiaries of the tax breaks are those investors who are high in the tax rank. Municipal Bonds work well only if you have a large capital base, and you wait until maturity.

Real Estate Investment Trusts (REITS)

Real estate has a high rating when it comes to generational wealth. It provides great returns in the long-term. A REIT investment can either be a property-type or one determined by the geographical location. The 4 Commercial property types;

  • Retail
  • Office
  • Industrial
  • Multifamily

Demand and supply forces have a significant influence on the property, and thus they offer different characteristics.

The REIT mainly manage the real estate property and are should pay not less than 90% of their taxable income to benefit tax exemption. Stocks perform well due to the appreciation of property and rising rents. That results in an increase in dividends paid on shares held. Most of them pay a dividend of between 3% and 5%.

The REITs are more prone to impacts of rising interest rates compared to stocks. This is because the companies demand high operational cost to run properly. Because they are required to pay almost all the income they earn every year, they turn to loans to remain in operation. Rising debts, thereby, forces the companies to issue shares. It means diluting the ownership of the current shareholders.

REITs were a preserve of the few wealthy until the 60s when the REIT Act got signed into law. The act allowed the retail investors to find the way to the stock exchange market. Those with no financial muscle to invest in numerous types of properties could try this approach.

Some companies through the IRS are now providing other services for tax purposes such as storage of data, monitoring cell-phone towers, and mortgage notes. Those that have an interest in mortgage have the ability to pay higher income than those that work mainly on the real estate.

The best thing though with REITs is that they experience problems only due to a rapid rise in interest rates. Otherwise, they can operate well and to pay their shareholders well.

Master Limited Partnerships

MLP involves a group of companies with businesses like the ownership of certain types of assets mainly oil and gas and storage infrastructure. The primary objective for the formation of MLP is to benefit from tax reduction (avoid double taxation), and other investments. They operate as partners and not as individual entities. These businesses have the right to pass on expenses and profits to the owners. They do not pay corporate income taxes.

Two types of MLP Owners

  • General partner: has the role of operating the company and can also own shares of the partnership.
  • Limited Partner: plays the role of issuing shares (traded as regular stocks). Also, pays for distribution expenses from the cash flow.

The partnership cash flow is immune from commodity prices evident in other energy companies. The reason is, the fees charged on energy products are determined primarily by the volume in the pipeline or storage. The owners of shares in these types of partnerships are referred to as unitholders.

MLP give yearly dividends ranging from 5%-7%, which is higher than other types of dividend stocks or REITs

Similar to REITs, MLP pays most of their income to the owners and may have to issue shares to sustain future growth. The effect is the dilution of current investors. Getting into debts translates to higher rates and less cash flow for distribution. Other than the corporate level, the investors too, receive a tax break. If they make many distributions, that is referred to as return of capital and not income.

Bank Accounts

Banks offer very little on savings by the account holders (an average rate of 0.16%). Despite that, some banks will offer as much as 4% on your savings. But that happens on if you follow set certain rules. Take online-based banks. They pay more than those banks with branches all over. Some of these banks might require you to do a certain number of debit transactions in a month, or even do online banking or spending a certain set minimum in a month. If you only meet those conditions, then, no doubt, you will benefit from higher interests rates on your savings.

Foreign Bonds

Often, bonds issued by foreign governments and companies offer better rates. In fact, they are sometimes beat the rates provided in the domestic markets. A reduction in the interest rates for example in Europe or Japan would put foreign bonds at a better place. That is if the local interest rates continue rising. Other currencies will lose their worth if the dollar regains its value. That would translate to other government’s difficulties to repay their loans. In such a scenario, the interest costs of other currencies would hike.

We have seen what each of the investment options has to offer, the benefits and the risks each of them carries. The key to any successful investment is to diversify. Do not rely on dividend yielding stock as the sole investment. A dividend growth more lucrative than dividend stocks as pointed out. Go ahead and dare to risk and see what comes out of it. You are more secure with different streams of income.

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