The 12 Best Income Investments for 2024

Even with the big end-of-year rally, and the drop in yields that comes with all price increases, yields are considerably higher than where they stood at the start of 2022. Investors now can get 2% to 5% yields on municipal bonds; 7% or more on junk bonds; 5.5% to 7% on preferred stock; 3% on convertibles; and 4% across the Treasury curve, from notes maturing in three years or less to bonds with 30-year maturities. This may not be time to be a seller. 

“Don’t give up on bonds just yet,” says Ed Perks, lead portfolio manager of Franklin Income fund. Corporate bonds yield an average of about 5%, which he views as attractive. The junk market appeals to him, given average yields of about 7.5% against a benign credit outlook.

Cash, too, remains appealing, with Treasury bills yielding over 5%. That yield will most likely come down—the market now anticipates a fall to 4% by the end of 2024 and to 3.25% by mid-2025—but those rates aren’t shabby and exceed the current 3% inflation rate. Cash is a real asset class now.

Dividend-oriented stocks, though, could be the best source of income and capital appreciation in 2024. Most yield-rich sectors badly lagged behind the
S&P 500
index’s 26% total return in 2023, with consumer staples and utilities, in particular, trailing far behind. Looking across dividend-rich sectors, there are yields of 5% to 8% on pipeline companies, 7% on telecoms, 4% on electric utilities, 3% on leading staples, and 4% on real estate investment trusts. There’s also a solid chance for price gains as their shares play catch-up with the S&P 500.  

Each year, Barron’s ranks 12 sectors of the stock and bond markets, based on our view of their relative appeal. We’ve done well in recent years, including 2023, when our No. 1 choice, energy pipelines, had the best return among the 12, and our bottom choice, utilities, fared the worst.

This year, we favor high-dividend stocks in the U.S. and abroad, as well as pipelines and electric utilities. We’re less enthusiastic about municipal bonds after a big drop in yields over the past two months. Here’s a look at a dozen income-generating sectors and specific ways to gain exposure to them.

1. U.S. Dividend Stocks

This could be an excellent year for higher-dividend stocks after a mediocre one in 2023, when they lagged behind the S&P 500. 

Lagged is an understatement. Many industries simply sat out the technology-led rally in 2023 that propelled the S&P 500 to just shy of a record high. Healthcare, consumer staples, and energy were little changed in 2023, while electric utilities and telecom stocks finished the year in the red. As a result, the $51 billion
Vanguard High Dividend Yield
ETF returned 7% in 2023, after holding up much better than the S&P 500 in 2022. That’s a great setup for the year ahead. 

There are a lot of ways to invest in dividend payers, including broad mutual funds or ETFs—and a lot of yield to be found. The Vanguard High Dividend ETF now yields 3.1%, about double that of the S&P 500, and is weighted toward the largest dividend payers like
JPMorgan Chase
and
Exxon Mobil.

The $52 billion
Schwab US Dividend Equity
yields 3.5% and includes such stocks as
Broadcom
and
Home Depot.
The lower-yielding
ProShares S&P 500 Dividend Aristocrats
holds companies with 25 consecutive years of annual dividend increases. 

For even more yield, the smaller
Invesco Dow Jones Industrial Average Dividend
ETF offers a 3.6% payout. The ETF is a variation on the so-called Dow Dogs, or the 10 highest-yielding stocks among the Dow industrials, and is weighted toward the highest dividend payers in the benchmark, led by
Verizon Communications
and
Walgreens Boots Alliance,
each of which makes up about 10% of the portfolio.

2. International Dividend Stocks

It isn’t hard to find high dividend yields outside the U.S., if for no other reason than overseas companies tend to emphasize dividends over share repurchases.

International stocks yield about 3% on average, based on the
iShares MSCI EAFE
ETF, double that of the S&P 500. The higher yield hasn’t translated into stronger performance. The tech-heavy S&P 500 has crushed the EAFE ETF over the past 10 years, gaining 12.1% annually against 4.3% for its international counterpart. That underperformance continued in 2023, when overseas stocks lagged behind by about seven percentage points. They could do better in 2024, due to lower valuations and a potential weakening in the dollar as the Federal Reserve looks set to cut short-term interest rates.

The international stocks also offer a lot more income. Dividend-oriented ETFs include the
iShares International Select Dividend
fund, which yields 6.5%, and the
Schwab International Dividend
fund, which yields about 4%. Both count iron-ore miners
BHP Group
and
Rio Tinto
among their largest holdings. 

Emerging markets, which trailed the S&P 500 by 18 percentage points in 2023, also are a good source of yield. The
iShares Core MSCI Emerging Markets
ETF, which counts
Taiwan Semiconductor Manufacturing
and
Samsung Electronics
as its two largest holdings, yields about 3%.  

High yields are plentiful in the United Kingdom market, and American investors there aren’t subject to withholding taxes on dividends, unlike most of the rest of Europe.
Shell
and
Unilever
yield about 4%, while
BP
is at 5%, The
iShares MSCI United Kingdom
ETF yields 4%.

3. Energy Pipelines

Pipeline stocks are coming off two strong years, including a 21% return in the
Alerian MLP
ETF in 2023. The good times should continue in 2024. 

The math is simple: Investors can get 5% to 9% yields plus an average of about 5% annual dividend growth. This could mean another year of double-digit returns for the transporters of crude oil, natural gas, natural gas liquids, gasoline, diesel, and jet fuel. 

Demand is expected to grow—it’s pretty clear that oil and gas will remain critical energy sources in the U.S. for decades to come—and capital needs are modest because the U.S. pipeline infrastructure is largely built out and it’s hard to get regulatory and environmental approval for new construction. That’s favorable for pipeline operators. 

“The companies continue to trade at high free-cash-flow yields with 5% dividend growth, and most are buying back shares,” says Greg Reid, head of energy investments at Westwood Group Holdings, which runs the Westwood Salient MLP & Energy Infrastructure fund.

The industry is divided into partnerships like
Enterprise Products Partners
and
Energy Transfer
and corporations like
Kinder Morgan,

Williams Cos.,
and
Oneok.
Many investors favor the corporations because they prefer simpler 1099 tax forms to K-1s. 

But partnerships outperformed in 2023 due in part to scarcity value—there’s a shrinking number of them—and they still yield more than so-called C corporations. Enterprise Products yields 7.6%, Energy Transfer pays out 9%, while
Kinder Morgan
and Williams offer yield in the 5% to 6% range. Some investors prefer Williams due to its natural gas focus, given that long-term U.S. gas demand is probably better than oil.

Investors can get yields of close to 10% on closed-end funds like the
Kayne Anderson Energy Infrastructure
or
Tortoise Energy Infrastructure,
both trading at 15%-plus discounts to net asset value.

4. Utilities

Electric utility stocks are coming off a disappointing 2023—the
Utilities Select Sector SPDR
lost about 10%— but 2024 looks considerably better.

The case for utilities starts with the industry’s profit outlook, which is the most favorable in decades due to the continuing buildout of wind and solar power and the upgrade of transmission networks. That could translate into annual earnings growth averaging 6% to 7% for the rest of the decade. Combine that with dividend yields averaging nearly 4% and annual total returns could be about 10% without any revaluation in the stocks. Utilities are also trading at an average of about 16 times projected 2024 earnings following 2023’s decline, against 20 for the S&P 500. 

“The utility dividend yield is a lot more attractive relative to the 10-year Treasury than it was a few months ago, and price/earnings ratios relative to the S&P 500 are 15% to 20% below historical averages,” says Jay Rhame, CEO of Reaves Asset Management, which runs the
Reaves Utility Income
fund. 

Among industry leaders,
Duke Energy
and
Southern Co.
yield about 4% and trade for 16 to 17 times projected 2024 earnings. The stock of
NextEra Energy,
the largest utility by market value and the leader in renewables, fell more than 25% in 2023 and lost its valuation premium. It trades around 18 times 2024 estimated earnings per share and yields 3%, with above-average projected profit growth.

5. Telecoms

After getting crunched in the first half of 2023,
AT&T
and
Verizon Communications
rallied in the past two months on investor hopes that competitive and pricing pressures are easing. That could be a good setup for 2024. 

Despite recent gains,
AT&T
and Verizon are cheap—they trade for seven to eight times projected 2024 earnings—and have yields of about 7%, among the highest in the S&P 500. David King, the lead manager of the Columbia Flexible Capital Income, likes them both. He notes that Verizon has never cut its dividend and even boosted it slightly in September. AT&T’s dividend should be safe amid improvement in its free cash flow, King says. 

Don’t forget
T-Mobile US,
which joined the dividend-paying crowd when it initiated a payout in September. It currently yields under 2%. The company now has a larger market value than AT&T or Verizon due to market share gains and the benefits of its merger with Sprint in 2020. The company plans to return $60 billion to shareholders in dividends and buybacks from 2023 through 2025, or nearly a third of its current market value.

6. Convertible Bonds

Convertible securities are designed to offer the upside of stocks and downside protection of bonds, and they delivered on that in 2023 with a 13% return, based on the ICE BofA U.S. Convertible Index.

That was about half of the gain in the S&P 500, but the $250 billion market has few megacap issuers, and its performance tends to track small-cap equity indexes. The 2023 advance followed a terrible 2022, when converts were down about 20% amid a rout in stock and bond markets.

Investors can buy ETFs like the
SPDR Bloomberg Convertible Securities,
a group of open-end funds, or individual issues that typically trade like other bonds in the over-the-counter market. New deals recently have carried rates mostly in the 3% to 4% range, lower than what the issuer would pay for regular debt, in return for an equity conversion option with premiums in the 30% range—meaning the stock needs to rise 30% for the equity conversion to have value. The SPDR Bloomberg ETF yields about 2%.

Issuers in recent months have included
Uber Technologies,

Sphere Entertainment,
utility
Evergy,
and
Apollo Global Management.
Michael Youngworth, the convertible securities analyst at BofA Securities, says converts look fairly valued based on mathematical models, and he’s constructive on 2024 assuming a benign equity and rate backdrop.

7. Real Estate Investment Trusts

Real estate investment trusts have surged since their October lows on the back of a sharp decline in interest rates, with the Vanguard Real Estate ETF rising nearly 25% over the past two months. It returned 13% in 2023, including reinvested dividends.

Gains may moderate in 2024 because funds from operations, a key REIT cash-flow measure, could rise in low- to mid-single digits, half of the expected increase in S&P 500 earnings. Yields in much of the sector remain appealing, with the Vanguard ETF paying out about 4%.

Piper Sandler analyst Alexander Goldfarb says the sector’s outlook is good, as there is little new supply beyond a current wave centered on apartments and warehouses. Nobody, he notes, is building new malls. 

That’s reflected in recent REIT strength, which has been concentrated in formerly depressed sectors like malls and offices.
Simon Property Group,
the top mall REIT, is up over 30% from its October low to $143 and yields 5%.
Boston Properties,
a leading office REIT, has risen about 40%, to $72, and yields 5%. 

Apartment REITs, long in favor with investors, have lagged behind this year amid growing multifamily supply in the Sunbelt and slowing earnings growth.

Goldfarb favors mall leader Simon Property,
Brixmor Property Group,
and
Kite Realty Group Trust,
which operates strip malls, as well as warehouse operators
EastGroup Properties
and
Terreno Realty.

8. Mortgage Securities

Mortgage securities don’t get the same attention as Treasuries and corporate bonds, but they deserve it since they offer a good alternative to both.

Federal agency mortgage securities, mostly from
Fannie Mae
and
Freddie Mac,
dominate the $8 trillion market. They carry little or no credit risk and yield about 5%. While spreads on high-grade corporate debt are historically tight versus Treasuries, the spread on mortgage securities, at nearly 1.5 percentage points, is about a half-point wider than the historical average. The market returned about 5% in 2023.

Investing directly in mortgage securities is difficult due to complex cash flows and limited liquidity. That makes mutual funds and ETFs the best way to invest. The biggest mortgage ETFs are the $29 billion
iShares MBS
and $18 billion
Vanguard Mortgage-Backed Securities.
Current yields are around 3.5%, but they hold securities trading at discounts to face value. This results in higher yields to maturity—about 5%—and upside potential if rates continue to fall.

The largest mutual fund is the $32 billion DoubleLine Total Return Bond, which is managed by a team led by Jeffrey Gundlach. It takes more risk than the ETFs with exposure to nonagency mortgage securities and asset-backed securities, including those with junk ratings, and yields more than 5%. Gundlach said in early in December that the mortgage market “remains attractive” with wide spreads to Treasuries and a good risk/return setup with most securities at discounts to face value.

9. Junk Bonds

Junk bonds are coming off a strong year—but investors may have to lower their expectations for 2024. 

The market is less appealing relative to U.S. Treasuries than a year ago. Why? After gaining more than 12% last year, the difference between junk yields and those on equivalent Treasures, known as the spread, has narrowed from almost five percentage points to about 3.7 points, tight by historical standards. The average junk issue yield, at around 7.5%, is lower than it was compared with a year ago, when it was about 9%.

Kevin Loome, manager of the T. Rowe Price U.S. High Yield fund, says that “a lot of the capital appreciation story has played out” with the rally in 2023. He expects 2024 to be more of an “income” year, which could mean high-single digit returns with a potential bonus if Treasury yields decline.

A simple way to play the junk bond market might be the $19 billion
iShares iBoxx $ High Yield Corporate Bond
ETF, a good proxy for the $1.3 trillion market. It returned 12% in 2023, reversing a similar loss in 2022, and yields almost 6%.

Investors with greater risk tolerance could buy leveraged closed-end junk funds like the
PGIM High Yield Bond
fund, now trading at about a 10% discount from its net asset value and yielding 10%. The
First Trust High Yield Opportunities 2027 Term
fund trades at a double-digit discount to its NAV and is due to liquidate in 2027.

An alternative way to get market exposure is through leveraged loans, which carry floating rates. The closed-end
Nuveen Credit Strategies Income
yields 12.5% and trades at a 12% discount to its NAV. The
Blackstone Strategic Credit 2027 Term
yields 10%, trades at an 11% discount to NAV, and is due to liquidate in 2027, which should enable investors to capture the discount.

10. Preferred Stock

The preferred market returned about 10% in 2023, based on the
iShares Preferred & Income Securities
ETF, and preferreds could see high-single digit returns in 2024, assuming no major changes in rates, says UBS analyst Frank Sileo. 

One positive is that issuance was modest in 2023 at about $14 billion, and redemptions outpaced that amount. The trend could continue into 2024. Yields are now in the 5.5% to 7% range.

Preferred stock offers yields comparable to corporate bonds and tax benefits, since dividends usually are treated like those on common stocks and taxed at a top federal rate of 20%.

The downside is that most preferred is perpetual and thus can be acutely sensitive to changes in long-term rates. When rates shot up in 2022, the iShares Preferred & Income Securities ETF dropped almost 20%.

Banks also dominate the $300 billion market, and the risks there were highlighted when the failures of Silicon Valley Bank and First Republic Bank led to a wipeout of their preferred. The leading issuers, however, are big banks such as
JPMorgan Chase,

Bank of America,
and
Wells Fargo.
They look very secure.

The preferred market is divided into $25-par securities that are exchange-traded, and preferreds denominated in $1,000 increments that mostly trade on an over-the-counter market. The latter are mainly targeted to institutional buyers, but individuals can buy them, and trade based on Cusip numbers rather than ticker symbols. The
First Trust Institutional Preferred Securities & Income
ETF focuses on the $1,000 market and yields almost 6%, while the $14 billion iShares Preferred & Income Securities ETF yields 6% and has more exposure to the $25 market.

A group of closed-end funds, including the Nuveen Preferred and Income Opportunities, yield 8% or more and trade at double-digit discounts to NAV.

Many investors invest directly in exchange-traded banks preferred with $25 face values, such as the JPMorgan Chase 4.20% series M issue and
Wells Fargo
4.75% series Z, They offer yields in the 5.5% to 6% range. The $1,000 market offers higher yields such as a 7.625% issue from
Citigroup
now yielding about 7% assuming it’s redeemed in 2028. 

11. Municipal Bonds

The municipal market remains a favorite fixed-income choice for individual investors due to tax benefits and historically strong credit quality. Unfortunately, the market has gotten less appealing after a historic rally in November that continued into December. Yields on intermediate and long-term yields are down over a percentage point from October highs.

“The muni market, much like other parts of the fixed-income markets, has run quite far, quite quickly,” says Sean Carney, chief municipal strategist for
BlackRock.
He still sees value in the market and points to an average yield of 3.25%, or a tax equivalent yield of 5% for an investor in a 35% federal tax bracket.

But 10-year AAA-rated munis now yield just 2.25%, or 60% of the 10-year Treasury. That ratio is near a 10-year low, below the average of about 75%. That means top-grade munis offer little tax benefit to individuals relative to taxable debt like Treasuries. Mutual funds with older debt like the giant Vanguard Intermediate-Term Tax-Exempt yield more.

The best value in the muni market is in long-term issues where yields are much closer to those on Treasuries. And yields are higher on debt with lower ratings than triple-A. LA Airport 29-year bonds yield about 4%, and junk-grade Ohio Buckeye tobacco bonds due in 2055 yield over 5%. 

Exchange-traded funds and separately managed accounts are increasingly popular with investors. The largest ETF, the
iShares National Municipal Bond,
totals $38 billion, and yields about 3%. Closed-end funds like the
Nuveen AMT-Free Quality Municipal
yield more than 4.5% and trade at double-digit discounts to NAV.

12. Treasuries

After a volatile year, Treasuries are back to just about where they started 2023, with 10-year and 30-year bonds now yielding around 4%. The market experienced one of its biggest rallies in the past 20 years since October lows as the
iShares 20+ Year Treasury Bond
ETF gained over 20%, outpacing the S&P 500.

There’s still a lot to like about Treasuries. They offer some cushion against inflation, which has been running at about 3% and coming down. They could provide a hedge against a decline in the stock market if the economy weakens in 2024. And they also could rally if inflation continues to recede. The negatives include huge Treasury borrowing needs for the foreseeable future at $1 trillion or more annually and a possible resurgence of inflation.

Exchange-traded funds are a good way to invest in the sector. Investors can get exposure to most maturity sectors and individual maturity dates. These include the
iShares 1-3 Year Treasury Bond,
the iShares 20+ Year Treasury Bond, and the
Pimco 25+ Year Zero Coupon U.S. Treasury Index,
which is one of the most sensitive Treasury ETFs to rate changes

Treasury inflation-protected securities offer an attractive alternative to regular Treasuries. The break-even inflation rate is just 2.2% now, meaning that TIPS will best regular Treasuries if inflation runs at more than 2.2%. TIPS funds include the
iShares TIPS Bond
ETF and
Vanguard Short-Term Inflation-Protected Securities.

Write to Andrew Bary at [email protected]