The Federal Reserve recently launched another round of quantitative easing.
The intent of the Fed is to support the housing market by reducing the rate on mortgages. Federal funds rates are expected to remain near zero until at least mid-2015. Even with low inflation, real interest rates are negative resulting in financial repression for savers. Your fixed income portfolio of CDs and government bonds is safe, but may not produce the income you need in retirement.
To earn higher yields, you may have to consider something new or unfamiliar. Some may include greater risk to increase yield. Here are a few ideas to help maintain your income.
Bank loans. Bank loans provide some protection from rising interest rates because of their floating-rate coupon and from credit deterioration because of their senior, secured position. PowerShare Senior Loan Port (BKLN) offers a distribution yield of about 5 percent.
Corporate Bonds. IShares Investment Grade Corporate Bond (LQD) tracks high quality corporate bonds that have a maturity of between three and 25 years. This longer duration exposes the fund to interest-rate risk. The distribution yield is about 3.8 percent.
Municipal bonds. Municipal bonds often yield more than taxable bonds including tax breaks. Power Shares Insured National Muni Bond (PZA) offers exposure to insured municipal debt with a yield of about 3.4 percent.
High-yield bonds. Bonds that don’t qualify as investment grade come with more risk but you can pick up yield. SPDR Barclays Capital High Yield Bond (JNK) yields more than 7.0 percent.
Preferred stocks. Preferred stock has characteristics of both bonds and stocks. IShares S&P Preferred Stock Index (PFF) is the biggest and most popular and yields nearly 6 percent.
Dividend-paying stocks. The last time the S&P 500 index had a higher yield than 10-year Treasuries was 1958. Vanguard Dividend Appreciation (VIG) holds stocks that have increased their dividends in each of the last 10 years.
Master Limited Partnerships. MLPs are publicly traded limited partnerships. They don’t pay corporate taxes and pass much of their profits on to their investors. ALPS Alerian MLP Index ETF (AMLP) gives access to 25 of the largest infrastructure MLPs.
REITs. Real-estate investment trusts (REITs) are securities that trade like stocks but are required to pay out 90 percent of their taxable income to shareholders as dividends. Vanguard REIT (VNQ) will give you a diversified basket of REITs and a yield of 3.25 percent.
If you haven’t looked at these kinds of investments before, now is an excellent time to start. Be sure to balance the risks with the income you require from your portfolio. Those with the highest risk may comprise only a small portion of your portfolio. But even at those levels they can add income and help diversify your holdings.
Contact a CPA or CFP® to help with your analysis.Information provided by Steve Forrest, MBA, CPA/PFS, CFP® and Pete Deacon MBA, CPA, CFP®, Forrest Financial Services, L.L.C., Windsor Heights, www.forrestfinancialservices.com, 277-3495.