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How Investors Could Find Income in a Low-Interest-Rate World

Investments that generate income can be an important part of your portfolio. But with interest rates at historic lows, you may have to look beyond common asset types to seek returns.

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Thanks to low interest rates and government bond yields, investment income could be hard for investors to find these days. Chris Haverland, Senior Vice President – Global Asset Allocation Strategist at Wells Fargo Investment Institute, believes the answer is to diversify, while focusing more on strategies and asset classes that could still generate regular income.

Here, Haverland explains why, where to look, and other key considerations for investors in a low-interest-rate world.

Diversify, and regularly rebalance, your portfolio

Haverland says that diversification could help investors’ portfolios by keeping cash flow steady. It also has the potential to help investors smooth out their investment performance so they are not forced to sell assets in a major downturn.

Rebalancing regularly can help investors stay where they want to be in terms of risk. “If you want to reduce risk, that’s certainly understandable,” Haverland says, although he adds that you may not keep up with inflation if you play it too safe. “If investors are willing to look into other asset classes, they could take a little more risk and pick up some potentially higher returns. Do it in a well-thought-out way and keep rebalancing.”

Consider investing in private debt or private equity

Investors who are qualified or accredited have a broader range of choices to further diversify their portfolios for potential income and/or long-term returns, Haverland says. That could include investing in private debt, private equity, or even in private real estate, where property ownership could reward you with monthly lease payments. “Review with your wealth planner what’s available across the asset-class spectrum, and consider spreading yourself out,” Haverland says. “There are some real opportunities out there, regardless of what’s going on with interest rates.”

Haverland reminds investors to analyze possible opportunities like these, as with any investing choices, with an eye to the potential exposure to risk to their portfolio. Opportunities may come with risks, and it is important for investors to understand and be comfortable with the level of risk of their investment selections based on their long-term objectives.

Give investing in stocks a closer look

Wells Fargo Investment Institute strategists have a neutral rating on many equity asset classes, from U.S. large and mid caps to emerging markets. However, many S&P 500 sectors are still generating high dividends per share. Share buybacks, while not as strong as 2018’s all-time high in the wake of historic tax cuts, remain strong. Haverland suggests considering investing in various higher-yield sectors, such as real estate, consumer staples, and utilities. 

Look into corporate bonds or preferred securities

If investors are considering investing in bonds, it’s not just about seeking the highest possible yields. It is important to understand potential risks associated with investments that may offer higher yields and evaluate whether they have a role in your portfolio.

“We think investment-grade corporate bonds are one place where you could get paid based on your level of risk,” Haverland says. “One of our favorite areas right now is residential mortgage-backed securities.” Investment-grade bonds have broadly outperformed high-yield bonds recently, and Wells Fargo Investment Institute strategists believe that’s likely to continue, even if market volatility rises.

Investors could also consider preferred securities, which offer the fixed yield of a bond as well as the potential for price gains of equities. “They’ve had a good run, but they are still yielding quite a lot at the end of 2019,” Haverland says. He adds that emerging-market debt, which has some strong yields, is also worth a closer look.

Risks

Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Dividends are not guaranteed and are subject to change or elimination. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Preferred securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer’s capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable, which may negatively impact the return of the security. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic condition.

Alternative investments carry specific investor qualifications, which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles which generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply as well, depending on the specific investment product.

Mike Woelflein is a business and investment writer based in Yarmouth, Maine.

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Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this article was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this article and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this article. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this article.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful. All investing involves risk, including the possible loss of principal.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

Alternative investments, such as hedge funds, private capital/private debt funds and private real estate funds, are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicles. There is no assurance that any investment strategy pursued by the Master Fund (and thus the Feeder Fund) will be successful or that the fund will achieve its intended objective. Investments in these funds entail significant risks, volatility and capital loss including the loss of the entire amount invested. They are intended for qualified, financially sophisticated investors who can bear the risks associated with these investments. Investors should read the fund’s offering documents prior to investing.

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