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  • AllisonDunlap

The Search for Income in 2020



With interest rates at historic lows, where can one find yield for a portfolio? Your investment portfolio should be generating income for you, even when the value is flat or declining, such as during the downturn we experienced earlier this year. Looking ahead, we can likely expect a prolonged period of heightened volatility in markets due to the uncertainty of our new pandemic normal, the upcoming election and the ongoing trade wars, to name a few factors. In the meantime, interest rates remain at record lows, making it difficult to generate income solely from a traditional bond allocation. Consider the following chart depicting 10-year Treasury yields over the past two decades:

So how can you get your investment portfolio to work for you during these challenging times? You can consider moving beyond traditional sources of income, i.e., treasuries and corporate bonds, and incorporating alternative income sources into your long-term strategy. A diverse portfolio that satisfies your risk tolerance and supports your goals and objectives is always advisable, but diversity of income sources can be helpful too.

The following types of investments can generate meaningful yield in a portfolio:

· High yield bonds - While they have the potential to provide high income and total returns, they are riskier and more volatile than their investment grade counterparts. Therefore, they should be incorporated only as a smaller portion of your overall fixed income allocation.

· Illiquid debt/private credit – Senior secured loans to privately-held companies can be a good source of yield for a portfolio, and there are credit interval funds that provide access to private debt with some liquidity. One such fund, the CION Ares Diversified Credit Fund, was yielding ~6% for the trailing twelve-month period ending 6/30/20.*

· Real estate investment trusts (“REITs”) – REITs own, operate and/or finance income- generating real estate across a range of property sectors. REITs are required to pay at least 90% of their taxable income to shareholders, resulting in high, steady dividend income. For example, the Dimensional Fund Advisors Global Real Estate Fund generated a 12-month yield of ~7% as of 6/30/20.*

· International equities – While large cap domestic equities appear over-valued and have largely regained much of their lost ground in the first quarter as measured by the S&P 500, international equities, both in developed and emerging markets, may have more room to grow. The MSCI EAFE benchmark, which captures large and mid-cap stock performance across 21 developed foreign markets, was still down by ~10% YTD through 6/30/20.* In addition to providing a potentially valuable source of public equity diversification, international equity funds can generate yields as high as 3-4%.

· Midstream energy master limited partnerships (“MLPs”) – The oil and gas market has taken a beating this year, and the midstream energy market, which is assumed to be less volatile than upstream exploration and drilling, has not been immune to severely depressed oil prices. However, certain ETFs that enable tax-efficient investment in midstream energy companies, with both corporate and partnership structures, have continued to generate yields ranging from ~6-9%.

Please keep in mind that these investments all carry varying degrees of risk, which should always be a key consideration in portfolio construction. For assistance in identifying specific risk-appropriate, yield-generating investments for your portfolio, please don’t hesitate to reach out.

I hope you are all staying healthy and finding humor where you can. With so many bleak headlines these days, I went looking for something a little less dire and found the following:

https://www.upi.com/Odd_News/2020/07/21/Company-offering-bailout-checks-for-lemonade-stands/2711595358305/

Take care and be well!

*Source: Morningstar


This communication is for informational purposes only and is not to be considered advice or a recommendation of a specific investment product or strategy for any individual. Information is from sources believed to be reliable but not independently audited. Views and opinions are subject to change at any time based on market and other conditions.

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