One of the more frequent questions I field at High Yield Wealth is, “Where can I find safe, higher-yield income?”safe-income
I understand and appreciate the recurrence of the question. Many High Yield Wealth readers are older investors. They remember the good old days. The days when you could buy a money market account that yielded 3% and a triple-A rated corporate bond that yielded 6%.
I can still remember, many moons ago when I was studying finance and testing to become a Chartered Financial Analyst, the classic investing paradigm: A young investor in his 20s would start with an 80/20 portfolio mix.[ad#Google Adsense 336×280-IA]Stocks accounted for 80% of the portfolio, bonds for 20%.
Decade to decade, the mix would gradually shift.
By the time the investor was 65, his portfolio would be 70%-or-more bonds and other fixed income and 30%-or-less stocks.
The classic paradigm worked because interest rates were real.
A quality bond portfolio paid 5% to 6% annually.
Concurrently, some long-term growth was provided by the stock portion of the portfolio.
After taxes and inflation, the investor would be ahead. Purchasing power was maintained, and so was the ability to sleep at night. An investment portfolio tilted toward fixed income worked.
Those days are gone, and no one knows if they will return. Central banks around the world have tried and succeeded at wringing interest rates out of financial investments. Today, a high-quality bond portfolio of varying maturities might yield 2% or 3% (and even that could entail accepting lower-quality investments). After taxes and inflation, today’s investor receives a negative rate of return. Purchasing power is lost year after year.
The hard reality today is that safe 6%-yield investments are as prevalent as unicorns. Today, meaningful income is directly correlated with risk. If you want more of one, you have to accept more of the other.
But no need to fret, volatility (or risk) can prove fleeting, particularly in quality dividend stocks.
Take longtime High Yield Wealth recommendation McDonald’s (NYSE: MCD), for example. During the infamous market sell-off in late 2008 and early 2009, McDonald’s shares dropped to around $50 a share from a previous high of $65. But even if you had bought at $65, you would still be ahead today from an income stance. You’d be earning a 5.2% yield on your $65 investment thanks to dividend growth. From a wealth perspective, you’d be up $30 per share on your investment.
If stable income is your thing, you’ll still need to accept risk and price volatility. Digital Realty Trust (NYSE: DLR), another High Yield Wealth recommendation, is a reliable higher-yield income REIT. Digital historically yields 5% or more. What’s more, it, like McDonald’s, reliably lifts its payout annually.
But to realize that higher yield, you have to realize share-price volatility. Digital’s share price bounces around: $15-per-share price movements during the year aren’t uncommon.
“To heck with it,” you might think. “I’ll take 2% and take the stable price.”
If only life were so simple. If you owned nothing but triple-A rated bonds, you could still see your portfolio value fall. If you buy a 30-year $1,000 bond with a 2% yield and the next day interest rates rise to 3%, you’d get only $804 for that bond if you were to sell. With interest rates at historical lows, higher rates are more likely than lower rates down the road.
So, there is no getting around it: If you want income, you need to accept risk. But risk can be tolerated with a diversified portfolio of quality dividend growth and higher-yield stocks and quality bonds. You just can’t do it with 20% of the former and 80% of the latter.
— Steve Mauzy[ad#wyatt-income]
Source: Wyatt Investment Research