Generating high and steady streams of income from investments is the goal of many investors, especially those in retirement or preparing to retire. With proper planning and diversification, investors can construct portfolios that provide attractive income while still managing overall risk. This article will explore key high income strategies across various asset classes and risk profiles.
High income strategies primarily focus on selecting securities and asset classes that pay above average yields or distributions while also providing capital preservation or appreciation. As with any investing, balancing return objectives with risk management is critical. Strategies may utilize fixed income products like bonds, dividend paying stocks, real estate investments, and certain alternative assets to accomplish an elevated yield target. Tactical allocation across these assets along with prudent security selection and ongoing monitoring can allow investors to achieve their income goals.
High Yield Bonds Offer Elevated Income With Higher Risk
High yield or ‘junk’ bonds represent debt securities issued by below investment grade corporations. Their lower credit ratings reflect higher probabilities of default versus higher rated corporate and government bonds. In exchange for bearing this increased credit risk, high yield bonds offer yields substantially above investment grade fixed income. Yields on high yield bond indexes currently range from 5-8%, several percentage points over comparable Treasury or investment grade bond benchmarks.
While attractive yields can boost portfolio income, investors must be prudent with high yield bond exposure. Limiting allocation to a moderate level while diversifying across issuers, sectors, and carefully analyzing credit fundamentals are critical risk controls. Active management by specialist teams can add further security selection capabilities versus passive high yield investing. Diversified high yield bond mutual funds and ETFs allow individual investors efficient access to this higher income asset class.
Preferred Shares Offer High Income With Intermediate Risk
Preferred shares represent an equity-debt hybrid security issued by corporations. They offer priority over common stock dividends and claim on assets, while being subordinate to all bond holders. Issuing companies tend to be large, investment grade credits.
By sitting between debt and equity in the capital structure, preferreds carry lower risk than equities but more than corporate bonds. Income investors favor them for their high, stable dividends which historically average around 6-8%. These dividends also tend to qualify for the lower tax rates applied to qualified dividends.
Beyond diversification and security analysis, investors should understand the nuances of preferred share features. Call provisions allowing the issuer to repurchase shares, interest rate sensitivity, and conversion options that can dilute value require research. Actively managed preferred stock funds can provide the requisite credit research and risk management oversight.
High Dividend Stocks Can Enhance Income With Appreciation Potential
Equity securities that distribute an above average share of earnings through dividends can enhance portfolio income. High dividend stocks tend to be concentrated in mature, stable sectors like utilities, telecom, and consumer staples. The dividend yields on indexes tracking high dividend payers range from about 3-4% currently. These stocks carry equity market correlation and volatility, though typically less than the overall market.
Investors can directly purchase baskets of high dividend stocks or gain exposure through specialized ETFs and mutual funds. These funds apply screens to isolate stocks with secure, growing dividends along with analyzing factors like earnings quality and valuation. Portfolio risk management best practices still apply, including limits on individual security exposure, awareness of sector concentration, and rebalancing back to targets.
An advantage of high dividend stocks is they provide the potential for capital appreciation and rising income. Companies can grow earnings and increase dividends over time. Investors must monitor the sustainability and growth of dividends. During economic slowdowns, dividends face cut risk requiring sells. Blending high dividend equities with other income assets can balance total portfolio income and risk.
Real Estate Investment Trusts Offer High Yields Plus Inflation Protection
Real Estate Investment Trusts (REITs) own and operate various types of commercial real estate properties. They are required to pay out 90% of taxable income to shareholders. REITs offer liquid exposure to real estate with yields historically averaging 4-6% across the various property sectors. REIT dividends also receive favorable tax treatment like stocks.
REITs provide diversification from bonds and stocks along with inflation hedging properties. Property values and lease rates tend to rise with inflation, growing REIT asset values and dividends over time. REITs do carry interest rate sensitivity given their use of leverage. Rising rates can negatively impact financing costs and share prices.
Exposure can be gained through individual REIT shares, diversified REIT ETFs and mutual funds. Active managers have greater ability for property sector and security selection. Quality REITs with secure, growing dividends from top properties can provide durable income and total return.
Other Alternative Assets Like Private Credit Offer Elevated Income
Institutions have long utilized alternative, less liquid asset classes to enhance portfolio return and diversification. Some alternative assets like private credit can also generate yields above traditional fixed income. Private credit funds lend directly to middle market and other borrowers not well served by banks. The illiquidity premium gained boosts yields to 6-10% net to investors.
Robust due diligence is required to assess manager quality and performance. Managers must exhibit disciplined underwriting and expertise in specialized lending markets like asset-based, venture debt, and distressed debt. Diversification across multiple private credit funds can help mitigate risks in this complex market. Allocations should be commensurate with an investor’s liquidity needs and risk tolerance. While less liquid than traditional income assets, private credit in a diversified portfolio can provide differentiated return and income.
Pursuing high income investment strategies requires balancing attractive yields with prudent risk management. Diversifying across lower and higher risk asset classes, limiting position sizes, and utilizing active managers can allow investors to achieve portfolio income objectives. Maintaining reasonable return expectations, understanding risk exposures, and ongoing monitoring is essential. A holistic plan integrating high income strategies with an investor’s time horizon, risk profile, and wealth objectives can produce optimal outcomes.