How To Generate Income In A Low Rate Environment

Doug Famigletti, Portfolio Manager

Michael Jamison, Portfolio Manager

February 12, 2020


Investing in bonds has become increasingly more challenging. Weak growth in Europe and Japan, coupled with a global fixed-income rally, has left debt securities in the United States hovering at near-record low yields for an extended period of time. Below are the most common debt investments along with their current yield ranges:


  • U.S. Treasuries: Less than 2%*

  • AAA Corporate Bonds: 1-3%**

  • High Grade Municipals: 1-3%**


(Sources: *U.S. Treasury Dept; **Moody’s)


In order to generate higher yield, investors can certainly take on more risk such as investing in Emerging Markets or Junk Bonds. However, for investors looking to take less risk and generate more income, here are 3 ideas:


Invest in high-quality dividend growth companies

Diversifying your portfolio to include high-quality dividend growth companies is an excellent alternative to fixed income investing. Investors should seek companies with strong fundamentals that have a track record of steadily growing their dividends. According to S&P Global, the historical average for the S&P 500’s dividend yield is roughly 2%, top dividend paying stocks in the S&P 500 can yield much more.


Adopt a covered call strategy

A covered call is an options strategy in which the trader holds a long stock position and sells a call option on the same security in an attempt to generate income and create downside protection. If you’re looking to generate income on your current portfolio, then selling calls against your dividend and non-dividend paying stocks can be an efficient and conservative way to potentially add more yield.


Invest in preferred stock

A preferred stock is a hybrid investment between common equity and corporate bonds. It has the same characteristics of fixed, dividend-paying securities such as bonds. According to Forbes, preferred stocks have generated an average return of 7.7% since 1900. In terms of the distribution of profits, preferred stock dividends are paid before common stock dividends.


U.S. bond investors are getting little in the way of real returns. Since inflation is running in the 1.5% to 2% annual range, these returns slide even lower after you factor in taxes. For investors whose portfolio is heavily dependent on generating income from debt instruments, now may be the right time to explore the alternatives.

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