7 Ways to Generate Safe Yield that you’ve never heard

If Financial Advisors were honest

Do you want yield? I do, I’m tired of stops. (that was a driving joke X’ed with a trading joke.)

Yield is tough to find. Bonds pay out .5-2% for Gubmint versions – in other words, below inflation. Buy bonds, lose money, should be the motto. Though technically, it should be own bonds, lose purchasing power, that doesn’t really have that finger kissing mwah quality to it that’s so essential in crappy unpictured memes.

But enough about me, let’s get to it. Here’s my favorite methods for getting yield without getting stuck like a pig.

Futures spreads

Futures spreads are cool as an ocean breeze – and I live near the Canadian ocean, so they’re actually really freaking cold. And it’s really windy, so trade them!

Putting aside incisive logical psuedo-syllogisms, futures spreads capitalize on the price of a future versus the underlying. They can’t be traded risk-free in the conventional markets, but they can in the crypto markets. You can sell a future and own the underlying, netting out any exposure to the underlying. (Hint: its called Bitcoin (or ETH (or some others:))). (See what I did there? Got to stop drinking in the AM – After Market, I mean, you judgey old sot. Don’t worry, the rest of the post is more on-point.)

Anywho (god, I hate that phrase and I like to use phrases I hate because I is having awful sense of humer and bad spleling. Forgive me, Lord, I know not what I do), Bitcoin futs can be traded risk-free against the underlying because futures and spot converge at expiry. It can work in conventional markets, but I’m not sure which instruments would really make sense – probably gold – but spot’s hard to hold in gold. Oil would work, too. Also, the rate of return won’t be much better than bonds.

Here’s a detailed guide on how to do the trade.

Yield Street

Yield Street has a decent selection of alternative assets. You have to be an accredited investor ($1m net worth, or other verification). They offer some interesting prospects – art investing the most unusual slant. You can invest in tranches of high-value art, essentially owning one of Rembrant’s brush strokes, I suppose. This seems more speculative, but considering their vetting and diversifying process, and the long-term art market, it not as risky as it sounds.

Still, YS has better things on the safe plate: a light buffet of real estate projects and private lending mainly. Also, they have the Prism Fund, which gives the investor a little piece of everything they offer.

Equity Multiple

EM requires you to be accredited as an investor because that’s the law. EM provides crowdfunding, bringing together quality projects in real estate with crowd investors. This allows the little guy (who has $1m at least) to invest smaller amounts into projects. They provide 2 types of investing: equity investing, with a larger upside potential, but greater risk, and debt investing, with lower upside, but less risk.

This off-market style of investing (they claim with some validity) is less subject to the extremes of the public trading. It does sharply reduce liquidity, so don’t use money you may need soon. However, ultimate payouts can be pretty good. These assets are uncorrelated to conventional markets, which is great during big drawdowns, because they’re immune to emotional overreactions.

In the 50 years prior to 2000, there were only 81 days of 3%+ movement in the S&P 500. Between 2000 and 2016, there were 119 such swings. As compared with private real estate, this represents the widening of a volatility gap that has existed for decades.

Equity Multiple White Paper

That’s a volatility increase in the conventional markets of 400%! Yikes. That is some kind of gut punching pain for investors. Hey, I like trading, so it can be cool, and I stay hedged most of the time, but still – it’s hard to take. It’s good to have something in less liquid markets exactly for that reason.

Both types provide solid returns, typically in the range of 12-18%. Holding time are anywhere from 6 months for bridge type loans (which payout higher APR’s) to 10 years for full-on equity holdings. Equity Multiple is here.

Celsius / Nexo Lending

This is in crypto, but it has no exposure to any crypto instruments, unless you want to use stable coins. However, you can directly invest fiat currencies. Returns are really good – between 8% and 12%, with no risk except for exposure to currencies. There is some platform risk, so do you own due diligence about that, but both platforms are credible and have a good reputation. Nexo is regulated with the European commission. Celsius has a more innovative compensation structure.

More on those opportunities here.

Cadence

Cadence is a new platform. Their spin is to use the ETH blockchain to – I don’t know what they do, really – but it uses smart contracts, so that’s cool. At any rate, you invest with US dollars, which are loaned out and repaid in that form, so I don’t think Eth token is used anywhere. It’s more the blockchain used for contract and tracking purposes.

I’ve been investing some with them for a few months now and I’m pretty happy with outcomes and with the way they treat investors. Because they’re so new, I’d say there is still some platform risk. Start small, in other words.

I’ve been getting real returns of 12% so far. There is some default risk on different loans, but they have

That being said, there is a steady stream of well-vetted opportunities. You’re supposed to be accredited, but it’s self-verifying, so you don’t have to deal with normal verification methods. We’ll see if that causes problems downstream or not. Cadence is here.

Cadence Platform offering

This is a bit higher APY than normal, but it shows what is possible. This high of an offering is less common, and a bit higher risk. But when it happens, I put in double the normal capital I use for most offerings.

Cadence provides a lot of information, so it’s very transparent. The loans are short-term, which means MUCH less risk. Defaults are far more likely to happen after 6 months to a year. These are usually short term loans for materials or high dollar consumer goods like sporting equipment.

Anyway, the cool thing is the default rate is super low for this one – 0.5%, with a loss cushion, meaning that defaults would have to exceed the cushion amount before the lender is impacted. So, if the cushion is appreciably higher than the default rate (I like double), then the investment is very safe.

One more safety feature – the loans are dispersed to many users, so there is a strong stabilizing effect. Some loans are definitely going to default, but it will be only a small percentage and that will hardly vary from the last period to the present. The risk is well established. And it’s not correlated to market risk, either. Excellent diversification tool.

DAIM – tax free return on Bitcoin

DAIM’s landing page

I like DAIM. My only reason for not using them is that I live in Canada. I asked them about an equivalent service in Canada, but there doesn’t seem to be one. Hmm – should I start a company? (FUCK NO! too much hassle for a’ old man.)

DAIM holds Bitcoin for you in institutional grade accounts. So, it’s safe. Obviously, Bitcoin is fairly risky, especially short term. I’d recommend getting in after a downdraft pushes it 25% below the 200 day moving average. And if it goes below $4000, then it’s definitely time to buy.

But how is this low-risk? DAIM puts your Bitcoin into an IRA, so gains are tax-free until withdrawal. If you go ROTH (duh, what else?) then your gains are tax-free forever (hooray!). Obviously, that’s ideal for something like Bitcoin, where returns can be super-high. So the tax risk is where I’m including this one here.

Unfortunately, they don’t offer ETH or other crypto, yet. I hope they do soon, and I imagine ETH will be added soon after it hits the conventional futures markets. Check out DAIM here.

Smartly Selected REITs

O and FRT are probably among the better investments here.

Realty Income Trust has been around since 1994. It boasts a massive portfolio of stable business clients. Some of these are impacted by the lockdown, but it’s pretty much an up/down situation, netting out at more or less zero. Market cap is $22B and occupancy rate is 98.5%. O specializes in providing a stable dividend and has made many statements to that effect. The REIT has had some fairly steep drawdowns, though, hitting a 5 year low during the Covid panic sell-off. It bounced back very hard, almost doubling from the lows in a month.

O Clients

Federal Realty Trust is a de facto Dividend King, having never cut its dividend in over 50 years.

I like these well enough, but I do prefer getting into them via the put selling method. Selling puts on an instrument provides yields more than double the dividend in most cases, if you select the right time horizon. O has yielded about 8% per year, including dividends for the last five years.

Conclusion

Plenty of alternate strategies for yield exist out there. Most are high risk, to be honest. Some carry very high return potential and a good chance of going bust. Some carry very low risk and will almost certainly provide decent yield. The conventional markets will seldom carry yield without risk. The Realty investment Trust – the last one – is such an instrument. While it offers a handsome return, the drawdowns are pretty hairy when they come. O is much more correlated to the overall markets than any of the others.