After a decade of ultra-low interest rates, investors are no longer limited in their search for yield. While bonds have historically been the go-to option, there are now alternative investments that can offer robust returns.
The Bond Dilemma
John Rekenthaler, director of research for Morningstar Research Services, highlights the fact that investors have flocked to intermediate- and long-term bond funds despite their lackluster performance. These funds have experienced negative returns over one-, two-, and three-year periods, and have only managed to eke out marginal gains so far this year.
The question then arises: What alternatives exist that can outperform bonds and provide investors with attractive returns?
A New Landscape of Abundance
Michael Arone, chief investment strategist at State Street Global Advisors, asserts that the investment landscape has shifted from a scarcity of income and yield to one that is more bountiful. This means that investors no longer have to take on excessive risk to capture income.
One particularly enticing option on the market is preferred stocks, which offer a blend of stock and bond features within a single investment. Arone explains that preferred stocks strike a balance between stable, fixed dividend payments (characteristic of bonds) and potential equity-like appreciation.
Exploring Preferred Stocks
Compared to the current Treasury bill rates, which sit above 5%, preferred stocks provide investors with an investment-grade security that yields 6.5%. This solid income is coupled with relatively low credit risk, making it an attractive proposition in today's market.
One such offering is the SPDR ICE Preferred Securities ETF (ticker: PSK) by State Street, which boasts a yield of 6.56%.
The Appeal of Short-Term T-Bills
While seeking alternative investments, it's important not to overlook the continuing attractiveness of short-term Treasury bills. The key is to hold these bills until maturity, rather than attempting to predict long-term interest rate fluctuations.
For investors interested in short-term Treasury bills, the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) provides a yield of 4.1%.
In this landscape of abundant options, investors can broaden their horizons beyond bonds and target investments that offer strong returns while managing risk effectively. By considering preferred stocks and short-term T-bills, investors can enhance their income strategies and make well-informed decisions in today's market.
ETFs: A Profitable Avenue for Income
When it comes to generating income, investors have another option to consider: ETFs that focus on dividend-paying stocks. These ETFs provide an opportunity to invest in companies known as "dividend aristocrats," which are companies in the S&P 500 index that have consistently increased their dividends for 25 years or more.
One such ETF is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). With assets totaling $11.65 billion, this fund tracks the S&P 500 Dividend Aristocrat Index. It currently offers a yield of 1.95% and has delivered a year-to-date total return of 4.43%.
At first glance, the yield on dividend stocks may not seem impressive. However, there is a long-term benefit to adding them to your investment portfolio. Unlike bonds, stock investing provides the opportunity for price appreciation. Companies that exhibit these characteristics have a track record of rewarding investors with outsized returns, outperforming bonds in the long run.
Investors who anticipate an economic slowdown or possible recession should consider including high-quality companies in their stock portfolio. These high-quality companies often fall into the category of dividend growers. According to Arone, dividend growers are more likely to weather economic downturns and provide stability and consistent returns.
While money-market funds have been a popular choice among investors this year, it is worth noting that they invest in cash and low-risk securities. One advantage of these cash-like instruments is the ease of transferring funds from mainstream brokerage accounts.
When searching for money-market funds, it is essential to be mindful of fees. For example, the popular Fidelity Money Market Fund (SPRXX) offers a yield of 5.04% but has an expense ratio of 0.42%. On the other hand, the Vanguard Federal Money Market Fund (VMFXX) provides a slightly higher yield of 5.27% with a lower expense ratio of 0.11%.
However, it is important to exercise caution when investing in money-market funds. Arone advises investors to understand the liquidity, interest-rate risk, credit risk, and potential volatility associated with these funds. Juicy and attractive yields can sometimes be a sign of trouble, so it's crucial to be aware of the risks involved.
Overall, ETFs focused on dividend-paying stocks can be a profitable avenue for generating income. By investing in dividend aristocrats and including high-quality companies in your portfolio, you can potentially benefit from both consistent dividend payouts and the potential for price appreciation.
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