If you depend on fixed-income investments for part of your income, you probably haven’t been happy recently, as interest rates have hit historic lows. Even in a low-rate environment, you can broaden the income-producing potential of your investment portfolio.
Before taking action, it’s helpful to know what the near-term direction of interest rates may look like. The Federal Reserve has stated it plans to keep short-term rates at their current lows until at least mid-2015. The Fed doesn’t control long-term rates, making them less predictable, but it’s likely these rates will rise sooner than short-term ones.
Rather than worry about something you can’t control try focusing on things you can accomplish. One achievable goal is to create an investment mix including three types of income: variable, reliable and rising.
• Variable income investments. Some variable income investments, such as certificates of deposit (CDs), offer protection of principal, and the value of your investment won’t change with fluctuating interest rates, provided you hold your CD until maturity. Current rates are low, meaning CDs provide you with little income today, but their rates have the potential to rise along with short-term interest rates.
• Reliable income investments. When you purchase reliable income investments, you have the opportunity to earn more income today, and more consistent income over time, than you’d get from variable income investments. However, you’ll likely experience greater price fluctuations as interest rates change. Specifically, as interest rates rise, the price of your existing bonds typically fall.
• Rising income investments. When investing for income, you’ll want to keep an eye on inflation — because if the interest rates paid on your CDs and individual bonds are lower than the annual inflation rate, you may lose purchasing power. If this gap persists over time, it could grow into a problem for you. You’ll want at least some investment income to come from rising income investments, such as dividend-paying stocks. Not all stocks pay dividends, but with the help of your financial advisor, you can find companies that have paid —even increased — their dividends. If you don’t need the dividends to supplement your cash flow, you can reinvest them to build your ownership stake in these stocks. Keep in mind, though, that companies can reduce or discontinue dividends at any time. Remember that stock prices will constantly fluctuate, so the value of your principal could decline.
All three types of income-producing investments — variable, reliable and rising — offer benefits, along with risks which you need to be aware. Putting together a mix of these investments that’s appropriate for your individual needs, goals and risk tolerance may help you boost the productivity of the “income” portion of your portfolio — no matter what’s happening with interest rates.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.Information provided by Karl Ritland, Edward Jones, 1100 N. Hickory Blvd., Suite 201, Pleasant Hill, 266-8188, www.edwardjones.com.