Looking for yield in all the wrong places

Moving into riskier investments

Investments that act like bonds, paying out monthly cash flows to investors but carrying substantially more risk, are getting more attention from income investors these days.

"You see folks more interested in preferred stocks and higher-yield bonds and floating-rate notes, and those are all investments that have additional risks compared to high-quality, individual bonds or high-quality bond funds," Kersting says.

Redmond says preferred stock, a type of equity that pays a fixed dividend and is prioritized ahead of common stock in a bankruptcy, can be particularly appealing to fixed-income investors. But just because a preferred stock quacks like a bond doesn't mean it is one, Redmond says.

"Preferred stocks may behave the same way as bonds do, but there's no maturity at the end of the line. The maturity is perpetual," Redmond says. "The bottom line is if you want to sell, you may not get anything near what you paid for the investment. You're never guaranteed the face value back."

And, should the company go into bankruptcy, you'll be in line behind bondholders to get your money back, he says.

What's an investor to do?

Kersting says that how individual investors combat low yields depends on their financial situations. If low yields are putting pressure on fixed-income investors' day-to-day finances, it may be time for them to rethink their strategy.

While most investors don't accumulate a portfolio big enough to live off by cashing in their investments frequently and spending the proceeds, that's actually preferable to taking on large amounts of additional risk without a comparable reward.

"Don't try and reach for yield that's just not there anymore," he says. "The other option -- and investors don't prefer this option, but it is an option -- is to take withdrawals from your portfolio and generate the income through sales. Most investors, especially retirees, have saved most of their life, and part of the reason they did that is so they can take withdrawals from time to time. And, in a lower-interest-rate environment, those become more prevalent, I think."

All bond prices have had an astonishing bull run over the past five years, with the Bank of America Merrill Lynch US Corporate Master Total Return Index value up nearly 68 percent since October 2008. Cashing in on some of the appreciation in bond prices may be a better way to generate income than sinking money into fixed-income investments that may not pan out, Kersting says.

Beyond that, generating the income you need from investments is mostly about the painstaking work of building a suitable, balanced portfolio, Kersting says.

"Rates are extremely low, and unfortunately there's no magic answer," he says. "There's no silver bullet here. It's really about building a high-quality portfolio of both stocks and bonds, and from the stock side, making sure to include some of those dividend-paying stocks, even ones that pay rising dividends over time, as well to kind of give yourself a pay raise over time."


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