Just look at what’s happening in the neighborhood. Banks are offering less than 1% if you give them your money for a year. Hand it to the U.S. government for a 10-year bond, that bedrock of safety, and you’ll get less than 3%.
And that’s not the half of it. When the rock-bottom interest rates start to rise — and they eventually will — the value of your fixed-income investment could take a tumble as the return starts to look paltry.
This bind comes just as income has emerged as the top priority for more investors than ever.
“My clients are talking about it all the time,” says Maureen Raihle, managing director in Chicago for Merrill Lynch’s Private Banking and Investment Group.
No wonder: Some 40 million Americans are already over 65, and another 40 million are between 50 and 60. Everyone, it seems, is either retirement age or headed there — and they all need income.
In fact, income generation in retirement was cited as more important than any other financial goal by nearly 80% of investors surveyed last summer by Allianz Global Investors.
So what should you do?
The classic solution is laddering — buying bonds or CDs that mature at staggered intervals, such as every six months, once a year and every two years. Holding these short-term and longer-term bonds decreases interest rate risk by spreading it along maturities. If rates are rising, for example, as one bond matures the funds can be reinvested into higher-yield bonds.
But right now there’s a big problem with laddering. Meg Green, chief executive of Meg Green & Associates in Miami, points out that rates are so low “you’re not getting anything on the short end and are left with no income for the first few years.”
But there are other options if you’re willing to take on some risk.
Some big consumer-staples companies are offering attractive dividend yields,
While the yields will decline when the stocks strengthen, you could end up with some nice capital appreciation.
You can also play dividends through mutual funds. Carrie Coghill, chief executive of Coghill Investment Strategies in Pittsburgh, likes the Federated Strategic Value Dividend fund, now yielding about 3.3%. It has the benefit of geographic diversification, with exposure to both U.S. and overseas companies.
High-yield bonds, commonly known as junk bonds, sport yields that are more attractive than those of Treasurys — right now, their yields are about 4 percentage points higher.
There’s always the risk of default, but the default rate has fallen sharply, to 2.6% in April from a high of 14.5% in 2009, according to Moody’s.
And credit quality could strengthen further in a rising-rate environment, because the first leg higher in Treasury yields usually corresponds with a pickup in the economy. That, in turn, benefits the companies that have issued the bonds.
One other risk: Trading can be relatively illiquid, making it tricky to exit.