Real estate investment trusts, or REITs, are another investing option that provides diversification and generates income, says Shorten. REITs invest in commercial property, such as warehouses, office buildings and shopping centers, and some invest in mortgages.
REITs are required to pay out 90 percent of their income in the form of dividends to their shareholders. Many have dividend yields in the 4 percent to 6 percent range. However, due to some financial problems experienced by REITs during the financial crisis, they are permitted to pay up to 90 percent of those dividends in stock, rather than cash, through the 2011 tax year.
"REITs are a source of income, but they can be very volatile, as we saw during this recent downturn," says Shorten. "If you invest in a REIT, make sure it's one that is diversified not jut geographically, but also by the type of commercial property. That's crucial for diversification, stability and to dampen volatility."
You can buy shares in individual REITs, which trade on the stock exchanges, or REIT mutual funds, which invest in a number of different REITs. That provides additional diversification.