Generating Income in Today’s Low Interest Rate Climate Takes Creativity

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Investors who risked even a single penny in the stock or real estate markets over the past 17 years understand intimately the pain of losing money and how it can alter their mindset. If they deny it, they’re bold-faced liars or subconsciously blocking the memory—something that’s easy to do amid a bull market.
No one went unscathed in the harshest bear market in history between 2000 and 2003, and the same holds true for the financial fiasco of 2008-2009. During those periods, trillions and trillions of dollars evaporated from retirement accounts and home equity disappeared in the blink of an eye.
Investors and advisors should have walked away with hardcore lessons from each disaster, and learned how to weather financial storms. But it seems like many, to this day, are suffering hangovers from the past and don’t know quite how to kick it. They keep making the same mistakes, which is the true definition of insanity inside and outside the investment community: Doing the same thing, and expecting different results.
What are the biggest contributors to losing money with investments? A few of the usual suspects include:

  • Not having the discipline to sell positions
  • Buying too late and chasing performance
  • Lack of portfolio diversity
  • General ignorance about the stock market or real estate market
  • Taking on too much risk
  • Being too conservative

However, emotions can explain all of the above and a lot more. Here’s why. Now that we are all expected to be on this earth a very long time—much longer than our parents—outliving our money in retirement or not being able to retire at all are huge concerns. Two simple emotions—fear or greed—can determine an investment strategy from here on out. Both can be equally destructive and push you completely off the path to a quality retirement.
That’s particularly true for investors in the fixed income stage of life, where generating a decent income from low risk tools takes precedence. People nearing or in retirement can’t afford to chase growth and have their nest eggs dwindle; nor can they afford to let their assets collect little more than dust.
And, that’s basically what domestic bonds (10-year Treasury Bond: 2.15%, AAA-rated, 20-year Municipal Bond: 2.55%), CDs (3-Year CD: 2%) and money markets (1.16%) are providing.
If you think the above investments will come around because the Fed is officially in an interest-hiking mode, think again. Rates are going up but at a snail’s pace, and certainly not fast enough to create sudden shifts in traditional income markets. Many analysts believe that the Fed is more likely to go back to zero percent rates rather than let short-term rates get back above 5 percent.
Thankfully, the universe of income-producing tools is diverse. Right now, and in the near future, the key is to use options outside the traditional investment box. Here are some ways to generate healthy total returns and still keep income as the primary component to reduce risk when most domestic bond yields remain low.

Emerging Bond Markets

Investing overseas used to be difficult, especially for fixed-income instruments. Today’s exchange-traded funds (ETFs) make it much more practical and far less expensive. ETFs give you diversification and liquidity, too. Here are a few examples:
iShares JPMorgan USD Emerging Markets Bond (EMB) holds dollar-denominated sovereign and semi-sovereign debt (bonds issued by government-owned businesses) from emerging market countries including Brazil, Russia, Turkey, Mexico, Philippines, Indonesia, and Venezuela. EMB had a yield of 4.68 percent as of 6/20/2017.
PowerShares Emerging Markets Sovereign Debt (PCY) holds USD-denominated government bonds from more than 20 nations, with no more than 5% of assets in each country. Right now, the top allocations go to Serbia, Lithuania, Korea, Turkey, and Sri Lanka, Colombia. The yield as of 6/20/2017 was an admirable 4.98 percent.
Market Vectors Emerging Market Local Currency Bond (EMLC) holds bonds denominated in the issuer’s home currency. Top country weightings are presently Chile, The Philippines, Argentina, Brazil, Mexico, and Indonesia. The 12-month yield as of 6/20/2017 was 4.95 percent.

High-Dividend Equities

In addition to paying high income, dividend stocks have proven to deliver in tough economic times. From 1974 to 1982, a period marred by slow economic growth and inflation, dividends accounted for 56 percent of the S&P 500’s total return, according to the Stock Trader’s Almanac. In fact, total return (including dividends) over this period was an annualized 9.4 percent, compared to just 4.1 percent without dividends.
The iShares Dow Jones Select Dividend Index (DVY) has delivered an average total return of 15 percent between 2012 and 2016. It currently yields 4.92 percent.


If rates remain low, the high-yielding real estate space is a good place for money—not buying property, but investing in real estate investment trusts (REITs). REITs are required to pay out 90 percent of their earnings as income. That can provide some solid stability for a portfolio, and the yields are much higher than traditional stocks.
If you think about stocks in terms of average, long-term returns, investors can expect around 8 percent per year, according to CNBC. But if you’re holding REITs yielding 5 percent, you don’t need a big move to hit that long-term average. And with the fear in the real estate space right now, it won’t take much for REITs to start showing some capital gains, not just return of income.
The Vanguard REIT Index (VGSIX) has delivered 10 percent total returns over the past five years, and currently yields 4.29 percent.
As you can see, there are several ways—even in a low-interest rate climate—to preserve and even grow capital, and generate income without taking on huge risks. It just takes a little creativity and the willingness to invest in tools outside of the box.

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karen riccio

karen riccio