Are you starved for income? If so, you’re not alone.
Short-term interest rates have remained pegged near zero percent here in the U.S. for six-and-a-half years, holding down yields on everything from Certificates of Deposit to money market accounts and short-term Treasuries. The typical 1-year CD yields just 1%, according to Bankrate.com, while the average MMA or savings account pays out a “whopping” 0.46%.
Longer-term rates are starting to rise for several reasons: Anticipation of Federal Reserve interest-rate increases later in 2015 and 2016, concerns over future inflation, and the bursting of the bond bubble. But we’re still only talking about a 2.4% yield on the 10-year Treasury note and 3.2% on the 30-year Treasury bond, even after those recent increases.
Some traditional income-producing sectors of the equity market haven’t done you any favors, either. That’s because they often trade in lock step with long-term bonds, which are falling in value as I expected.
|Longer-term bonds still haven’t dropped far enough to boost their yields to attractive levels.|
Just look at the Utilities Select Sector SPDR Fund (XLU). It may yield around 3.7% … but it has lost around 9% of its value year-to-date. Then there’s the iShares U.S. Real Estate ETF (IYR), a benchmark for the Real Estate Investment Trust (REITs) sector. It may yield 3.6% versus 2% for the S&P 500 Index … but it’s down 3% year-to-date versus a rise of 3% for the S&P.
Bottom line? Traditional savings products yield next-to-nothing. Longer-term bonds still haven’t dropped far enough to boost their yields to attractive levels. And the usual income stocks and ETFs are reminding investors, once again, just how much interest rate risk they come with.
In my Safe Money Report, I name specific strategies to beat the lousy investments like those I just highlighted. But in the meantime, to give you a more generalized idea of what I’m looking at, there are dividend paying stocks in non-utility, non-REIT sectors that are showing fantastic dividend growth. Consumer staples, technology, and even financials are growing dividends substantially. Many of these stocks are being boosted by speculation of mergers and acquisitions to boot. Unlike fixed-yield bonds, or low-dividend-growth stocks, they can continue to perform well in a rising-rate environment.
Then you have select ETFs that use strategies to minimize interest rate risk, while generating better-than-savings/CDs/Treasury yields. They could work very well, too.
The same goes for more “stock-like” bonds known as convertibles, which you can purchase through various ETFs and mutual funds. Select options strategies, including writing covered calls, are another … er … option. So are Master Limited Partnerships (MLPs) in energy or related sectors.
Each comes with benefits and drawbacks, and finding the best choices involves a lot of work, which will be included in my Safe Money Report, which comes out just after the July 4th holiday. But these 30,000-feet-up general strategies can get you started here in Money and Markets.
Because if there’s one thing I’ve made clear, it’s this: We’re seeing major moves in the bond market, moves that tell me the next major phase in the interest rate cycle is upon us. That means more volatility, more pitfalls, and more opportunities lie dead ahead! The key to success is being properly positioned to avoid the former, and capitalize on the latter.
Until next time,