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Comprehensive Income Strategies in a Low Interest Rate Environment

Local Saratoga residents and advisors provide insight into income strategies and commentary on recent market events.

Caroline Delaney, Executive Vice President
Caroline Delaney, Executive Vice President

For income seekers and bond investors, the last three decades have been quite rewarding with high-quality investments producing strong yields and competitive absolute returns. However, like too many people going to the same well for too long, eventually the well dries up. In this situation, the high demand has led to high prices and, consequently, low yields. Since the high-quality income appears to have dried up or is in potential danger of drying up, one option is to find another place to dig. We have identified a wide range of potential income-producing investments, each with varying levels of interest rates and types of risks for clients seeking an income stream.

The Bear Market for Yields is Creating a Dilemma

The high yields and strong demand for high-quality bonds that drove the bull market has created a dilemma three decades later. In a sense, the bull market for bond prices has led to a bear market for bond yields. Whether bond investors realize it or not, this significant long-term trend of declining yields in high-quality fixed income securities appears to have come close to an end.

This bear market for yield comes at the worst possible time for the record number of retiring Baby Boomers seeking steady paycheck replacement and for lower risk clients seeking acceptable after-inflation potential returns from low-volatility, high-quality bonds.

Generating a higher expected or potential yield almost always comes with an increase in risk—a trade-off that is not easy to stomach in a market filled with uncertainty and record levels of volatility. Finding the right balance of yield, expected or potential total return expectations, and comfortable risk for our clients is critical.

The Income Spectrum

For investors willing to assume greater levels of risk in the attempt to achieve higher levels of income, the Maximum Income Profile offers investments with varying levels of risk coupled with the potential opportunity for very attractive income levels.

Some of the investment products and strategies that comprise the Maximum Income Profile include:

  • Emerging Market Debt
  • High Yield Corporate Bonds
  • High Yield Municipal Bonds
  • Preferred Securities
  • Dividend Paying Stocks
  • Master Limited Partnerships
  • Real Estate Investment Trusts

In Conclusion

This is a unique and challenging environment for investors searching for yield due to historically low rates which may stay low for an extended period of time. We believe it’s important for investors to diversify the sources of expected or potential yield in their portfolios based on the individual client’s risk tolerance. As always, Hillis Financial Services is happy to review any of these ideas with you at your convenience.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Stock investing involves risk including loss of principal. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. Additional management fees and other expenses are associated with investing in MLPs.

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