8 Treasury Bond Alternatives for Investors Who Need Income in 2019 and Beyond

Jon C. Ogg

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.