Interest rates are still at record lows and will remain so for years after Federal Reserve Chairman Jerome Powell recently suggested the central bank would not raise interest rates to prevent inflation. It seems possible.
The biggest challenge facing retirees today is how to turn nest eggs into income solutions, and the strategies they’ve relied on may not work well in today’s low-interest-rate environment, experts say. House says the new solution could be riskier than bonds, which have long been a common source of income for retirees. But you may want to take a little more risk.
“If you’re not willing to make some adjustments or accept different forms of risk, you’re basically locked into inflation risk and you’re stuck with it,” said Devin Pope, senior wealth adviser at Albion Financial Group. You will lose purchasing power.” Inflation risk is the possibility that the purchasing power of money will decline over time as the cost of goods and services rises.
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While there is certainly room for bonds in portfolios, experts say retirees may not be able to rely on bonds to generate income in ways they are accustomed to. Here are some additional locations.
Dividend stock
Dividend stocks are one way. Using these shares, the company pays shareholders periodically in the form of cash or additional shares.
Among dividend stocks, Pope likes 3M, Cisco and Verizon, which he says are strong companies with yields of over 3%.
But many companies continue to cut dividends, leading to a total plunge of about $108 billion in the last quarter, according to fund manager Janus Henderson. That’s why, says Pope, it’s best to look for quality companies that provide a steady income, rather than get higher incomes from companies that aren’t as financially strong. This includes a strong track record of committing to paying and increasing dividends over time, as well as a strong balance sheet and ample cash and liquidity.
“It’s about taking more risks, but it’s not about going too deep instead of going for very high yields with the potential for the company to go bankrupt or cut the dividend in half completely.” he adds.
For a balanced investment portfolio, Pope recommends around 20-30% in dividend stocks.
Donald Calcani, chief investment officer at Mercer Advisors, recommends adding high-dividend non-U.S. stocks to the mix. One of his ways is by utilizing the iShares International Select Dividend ETF.
“With the current weakness in the US dollar, dividends on non-US stocks may offer protection against future declines in the value of the dollar,” says Karcani.
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pass-through securities
Ryan Giannotto, research director at GraniteShares, recommends pass-through securities for retirees.
These investments distribute at least 90% of the earnings to investors, are exempt from corporate tax, eliminate the double-taxed dividends commonly found, and benefit investors more directly. They fall into four categories: Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), Closed End Funds (CEFs) and Business Development Companies (BDCs).
Combining them into a portfolio can generate 10% more income, says Giannotto — and he has proof. GraniteShares offers the GraniteShares HIPS US High Income ETF. It invests in a diversified basket of high-yielding pass-through securities, with yields surpassing his 10%, and at the end of July he reached 10.93%.
But Kelly Graves, a financial adviser at Carroll Financial, says higher yields mean more risk.
“There is no free lunch in the yield market,” says Graves. You may be concerned about business failure (the company going out of business and failing to pay your bills). And if yields fall, prices are likely to fall, he adds.
Freddy Garcia, Vice President of Left Brain Wealth Management, also recommends REITs. His firm’s analysis shows that during tough economic times, his REITs, particularly mortgage REITs such as his AGNC Investment Corporation and Analyst Capital Management, outperformed other asset classes two to three years after market declines. tend to.
While REITs haven’t performed as well in 2020, Garcia says they’re undervalued at the moment and have a lot of room to grow. An investor should keep between 5% and 20% of his total investment portfolio in his REIT, he adds, depending on the investment objective.
Keep in mind there is one risk with REITs, says Charles Sachs, planning director at Kaufman Rossin Wealth. Because REITs own office and retail space, less money is collected in rentals during the pandemic, and dividends may be cut accordingly.
Graves also likes MLPs “for clients who can tolerate price volatility in exchange for superior returns.”
“I like them because they are not interest rate or credit sensitive like almost all bonds,” he says, recommending a range of 4% to 8% across portfolios, depending on the investor. .
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