INCLINE VILLAGE, Nev. - Retirees must feel like the Federal Reserve has declared war on them and their savings. Interest rates are at historic lows and will remain low for years. For many, the income received from their investments has all but dried up. For others, they've had to move up the risk ladder to maintain their standard of living, exposing them to greater volatility. These are difficult times.
Most investors choose traditional income investments like CDs, money market funds, bond ETFs, and U.S. Treasurys. They either pay too little or will expose investors to big losses when interest rates rise.
A better answer, and one that I implement for many clients, is to own less traditional higher yielding securities across several investment classes. Few investors hold preferred stocks, but they are ideal for those seeking income. Even today one can buy an investment-grade preferred, such as Partner Re Series C, that yields 6.7 percent. There are others.
Preferred stocks are a key component in most of my client portfolios, but accounts also hold bank loan funds, emerging market debt funds, floating-rate loans, and exchange-traded debt.
You can receive more investment income, but you need to think outside-the-box rather than hold traditional vehicles. An investment grade Prospect Capital Note (PRY) yields 6.72 percent and is not callable until 2015. The Western Assets Emerging Markets Debt Fund (ESD) yields 6.5 percent and holds many investment grade sovereign bonds. The Eaton Vance Floating Rate Fund (EFR) yields 6.8 percent and will yield more when rates rise.
By the way, all of these securities were covered in previous Tahoe Bonanza articles, and at much lower prices!
Most retirees want to increase the return on their investments without the added volatility and risk of growth stocks. Investing in non-traditional asset classes, such as preferred stocks and emerging market debt, accomplishes this goal. Exchange-traded debt, utilities, and high yielding stocks should also play a role.
The bottom line: Retirees need not suffer with near zero interest rates. There is a better way.
- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.