4 Ways to Find ‘Real’ Yields in a Low Interest-Rate Environment


Looking for yield? You are certainly not alone. The demand for income-producing assets is growing and will continue to grow in the years ahead as more and more baby boomers leave the full-time workforce and navigate their way through a new chapter in their lives. But the Fed’s ultra-easy monetary policy is complicating things for income-focused investors by helping to hold yields lower than they otherwise would be. So what’s an investor to do?

Despite an historically low interest-rate environment, there are still ways to capture inflation-adjusted, after-tax “real” yields. Four such ways include:

1. Extend maturities – If you are willing to venture away from short-term bonds providing negative real rates of return and purchase intermediate- to long-term bonds, you can increase your yield. As you extend maturities, you will also increase the potential for bigger price swings in your principal. It is for this reason that I think investors extending maturities should mostly do so with individual bonds. Absent widespread defaults, with a diversified portfolio of individual bonds held to maturity, the price swings of today will be irrelevant in the future. If you manage your liquidity in such a way that you can avoid having to ever sell, then price swings can be ignored. Purchasing preferred stocks is another way to essentially extend maturities and capture higher yields. While I think preferred stocks deserve a place in an income-focused investor’s portfolio, I also think the allocation should remain relatively small.

2. Move down the credit quality scale – By moving from fixed income securities considered to have very little risk of default into those considered to have a higher risk of default, investors can also increase yields. This doesn’t necessarily mean moving into “junk” bonds. It could instead simply mean, for example, moving from double-A-rated bonds into triple-B-rated bonds.

3. Look for one-off opportunities in companies or industries that have experienced spread widening – Just as the stock market will offer one-off opportunities for investors, so too does the bond market. If you are not the type of investor who frequently runs bond screens, one way to identify one-off opportunities is to find companies with stocks that have sold off in excess of what would be expected based on the broader market’s performance, and then take a look at those companies’ bonds.

4. Move down the capital structure from bonds into equities – Given the low interest-rate environment of recent years, many investors have turned to dividend-paying equities to capture higher yields. This strategy can provide very nice streams of income, especially if you own dividend-growth stocks and have the wherewithal to hold stocks through thick and thin. If you decide to go this route, remember to calculate the opportunity cost of buying, say, a 3% yielding common stock that you anticipate will grow dividends over time versus, say, buying a 6.50% yielding preferred stock or bond.

There isn’t necessarily a universal best way to go about capturing “real” yields over time. Your investment objectives will help push you in one direction or another. I, for example, happen to use a combination of all four of the methods mentioned above.


To get more information please visit: LearnBonds.com/bonds | LearnBonds.com/uk/bonds

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
HTML Snippets Powered By : XYZScripts.com