November 2013 by Beth Wahlig
What is Yield Investing?
In today’s environment, it is discouraging to go to the local bank and see the rates you will get on a 6 year CD (certificate of deposit) or one year CD. The website, Bankrate.com publishes the average yield on bank CDs. The going rate today is 0.40% on a six month CD and 0.67% on a one year CD. You ask yourself – “Is that all I am going to get paid on my hard earned money?” Five year CDs will pay you more at an average of 1.35% but you will have to commit to leaving the money there for five years which is a long time. Two year Treasury bill is yielding 0.33% and the 5 Yr Treasury note is yielding at paltry 1.37%. Consumers need to think differently when hard earned savings are just sitting there earning so little interest and eroding the purchase power of their money for future needs. Recently, we have heard people say that they will wait until interest rates rise. Probably not a good strategy since they may have to wait quite a while for that to occur. Also, standing still in a rising rate environment is just not a smart plan.
So where should investors look to find better yields? There are a number of places to look for yield in the financial markets. Dividends on stocks are one of the first places to look. There are solid S&P 500 companies with stable revenues and earnings growth that are now offering dividends anywhere from 2.00% to 5.00%. It used to be just utilities, telecoms and consumer staples that offered these types of dividend yields. Now, companies in other industry sectors such as healthcare and industrials are offering dividends so an investor can own a diversified portfolio of names. Some particular stocks to take a look at are Duke Energy (with a dividend yield of 4.35%), McDonalds (with a dividend yield of 3.40%), Verizon (P/E of with a dividend yield of 4.10%) and Kraft Foods (with a dividend yield of 3.80%).
Other places to look if you do not want to invest in the equity market are in specific areas of fixed income. Investors should look at a short duration fixed income fund. These funds only invest in securities that have shorter maturities and are less likely to decline in value when interest rates rise. The average yield on these funds is around 3.00%. High yield debt and floating-rate bank loans are also investments that earn good yields in this environment at around 6.63% and 4.64%, respectively. They are riskier investments but recently have held their value in the current economy. At Chatham Wealth, we buy actively managed mutual funds in high yield and bank loans that over have historically beaten their respective benchmarks. You can also invest in these markets through ETFs such as JNK (SPDR Barclays High Yield Bond Fund) for high yield debt and BKLN (Invesco Power Shares Senior Loan Fund) for bank loans.
At Chatham Wealth Management, yield investing is one of the investment strategies that we offer. We have customized, managed portfolios to focus on the yield and total return rather than just capital appreciation for certain clients. We build portfolios that invest in solid companies with the best business models and sustainable competitive advantages in the current economy. These are the type of companies that have strong earnings growth and as a result can return a portion of earnings to shareholders through dividends. Dan Moskowitz, President & Chief Investment Officer has created three specific yield portfolios for our clients based on risk tolerance. The allocation within these portfolios can generate yields of around 3.95% for a conservative investor, to 4.11% for a moderate risk investor to 4.30% for a more aggressive investor. The portfolios invest in stocks, short duration bonds, MLPs, high yield bonds and bank loans.
An example of the allocation for a yield portfolio for a moderate risk investor is shown below.
The rules of yield investing have changed so consumers need to think differently about how to get a better return on their hard-earned money. The best way today is to create a portfolio that focuses on getting a better return in the form of dividends and current interest income along with capital appreciation.