With the latest spike in volatility in the stock market, investors are getting increasingly anxious about where to go for predictable but still attractive returns on investment.With yields on U.S.Treasuries and agency bonds near all-time lows, income investors will have to look elsewhere.
Remarks from the Federal Reserve's policymaking committee on Aug. 10 offered scant hope of meaningful upside in asset prices any time soon. The committee kept the target range for the federal funds rate at zero to 0.25 percent and said that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
While that's no surprise to anyone who's been tracking key economic data releases over the past few months, it's not what yield-seeking investors want to hear.
Issuance of high-yield corporate bonds hit record levels of at least $12.9 billion last week, after climbing for five straight weeks prior to that, according to data compiled by Bloomberg. But with the Fed's warning that the economic recovery may be slowing and reduced growth outlooks in the U.K. and China, some strategists believe investors' appetite for higher-risk assets may begin to wane.
Not David Garrett, a financial adviser in Logan, Utah. The financial crisis and the prospect of a long road to recovery, during which interest rates will likely remain depressed, have put investors on the prowl for higher-yielding assets, he says. He has developed an investment strategy using active management to buy and hold high-yield bonds when they're rising and sell them when prices drop. "We feel the market is coming our way," he says, as the income component of stocks starts to eclipse any gains from share price appreciation, which he expects to be minimal over the next 10 years.
Garrett sees a "sweet spot" in corporate high-yield bonds, which he prefers to hold in a diversified open or closed-end fund as opposed to single issues. He continues to hold two exchange-traded fundsâ??the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK). The iShares ETF's current yield is just under 9.0 percent, while the SPDR ETF is yielding 10.8 percent. By comparison, the Bank of America Merrill Lynch High Yield Master II Index yields 8.6 percent.
If you're not shaken by the spike in volatility in the stock market over the past three monthsâ??and believe the argument that performance over the next 10 years has to be better than over the past decadeâ??you might want to stick with dividend-paying stocks since the income stream they provide is much less volatile than any potential moves in share prices, says Cliff Remily, co-manager of the Thornburg Investment Income Builder Fund (TIBAX). While investors have been shifting money from stocks into bonds amid ongoing signs of economic weakness, they aren't pulling money as fast from dividend-paying stocks, says Remily.
His fund, now weighted 70 percent to stocks and 30 percent to bonds, has outperformed its benchmark, the Standard & Poor's 500-stock index, by 4.0 percent year-to-date as of Aug. 13. "With a dividend yield of 6.0 percent, most of our performance has been due to income," he says. "We've protected on the downside, which is what these strategies should do."
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