In the current financial climate, stocks are expensive. The S&P 500, a stock market index measuring the stock performance of 500 large companies listed on stock exchanges in the United States, is trading at 20.5 times earnings. This places it in the top 10 percentile of the most expensive stocks ever. Historically, when the S&P 500 has been priced at this level, it has averaged a mere 4% return over the next five years. This is not an encouraging prospect for investors looking for substantial investment returns. Therefore, investors must explore alternative investment opportunities to diversify from expensive indexes creatively.

Exploring dividend growth stocks

Dividend growth stocks have historically outperformed the S&P 500. These stocks are currently trading at a 20% discount to the S&P 500, making them an attractive investment option. Moreover, they have been shown to outperform the S&P 500 during recessions meaningfully. Dividend growth stocks are companies with a track record of consistently increasing their dividends. This strategy provides investors with an income stream and offers the potential for capital appreciation.

Considering commercial real estate bonds

The commercial real estate sector has been significantly impacted over the last two years. However, this has led to an opportunity in commercial real estate bonds, specifically investment-grade bonds. These bonds are currently yielding 9.33%, a return that is significantly higher than what the S&P 500 is projected to offer over the next five years. It’s important to note that this suggestion refers to direct investment in commercial real estate bonds, not Real Estate Investment Trusts (REITs), which are companies that own, operate, or finance income-generating real estate.

Investing in real assets

Tangible assets such as farmland, infrastructure, and timber forest have outperformed the S&P 500 over the past 30 years without having a down calendar year. These assets were positive during 2022, when the market faced significant challenges, remained positive throughout the COVID-19 pandemic, and were also positive in 2008 during the global financial crisis. Investing in tangible assets can hedge against inflation and offer diversification benefits.

The bonus: municipal bonds

For wealthy investors, municipal or tax-free bonds can be an attractive investment option. The taxable equivalent yield on municipal bonds is 7.4%. This yield is impressive in an expensive stock market and carries a fraction of the risk associated with the stock market. Municipal bonds are debt securities issued by states, cities, counties, and other governmental entities to fund public projects. The interest income generated from these bonds is usually exempt from federal income tax and, in some cases, state and local taxes as well.

Conclusion

In conclusion, in a high-priced stock market, investors must creatively look for ways to grow and protect their portfolios. Exploring alternative investment opportunities such as dividend growth stocks, commercial real estate bonds, real assets, and municipal bonds can potentially offer better returns and diversification benefits. However, investing in these alternatives requires time, interest, and expertise. If you lack any of these, consider seeking professional help to guide you through the process.

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