Income Investors Face Challenges as Economy Shifts
The search for high yields presents a quandary for income investors.
If interest rates rise in the future, the value of high-yield, longer-term bonds bought now will decline. But if a high-dividend-paying stock is chosen, the investor needs to be relatively sure that today's impressive dividend is here to stay.
"The economy continues to recover globally and a few months from now, when more data is in and people get comfortable with the reality of a recovery, the Federal Reserve could raise interest rates," predicted
The potential rising-rate scenario makes Berrick more interested in stocks than bonds, and primarily high-quality large-cap companies with predictable futures.
His favorite stocks with dividends around 6 percent are telecommunications firms
"Whether you realize it or not, if you're chasing yield you're chasing risk--since the market doesn't give anything away," asserted
Like Berrick, Wright includes the stock of
Despite the allure of dividend-paying stocks these days, bonds remain a major player in most investment portfolios.
"Money flowed into bond funds and out of stock funds last year because investors were seeking lower risk and more income," explained
With interest rates at record lows, investors can see the danger of locking in long-term rates that could escalate later. Any added risk is usually taken on gradually, with a move out of government-backed investments the first step, said Boone. Next, shift from AAA government bonds to AA or A bonds, rather than jumping right into junk bonds, he advised.
A more aggressive income bond fund is
More than half of its assets are in BBB-rated bonds, which is twice the exposure to that less-than-perfect class that most of its rivals hold. Junk bonds usually make up more than 10 percent of this fund's portfolio of more than 350 bonds.
Unlike competitors that invest heavily in government bonds, T. Rowe Price Corporate Income holds the debt of companies such as
"Some stocks are yielding pretty nice dividends right now," pointed out Boone, who especially likes the reasonably-priced stocks of telecommunications firms. "If your view is that rates are going up, the only way to keep up with that is to have growing dividends."
Investors must keep in mind there is risk in individual stocks because even companies with long histories of reliably paying dividends could suspend them. That's why it's important to consider factors such as the debt on a firm's balance sheet, he said.
"If a company is making a lot of money but paying out a small percentage in dividends, then there's a good chance the dividend will be there a pretty long time," Boone explained. "But if it is paying out every spare dollar in dividends, you should beware because that dividend is likely to be cut in lean times."
In stocks, Berrick also recommends the dividend yield of over 3 percent and potential for price appreciation of
That "no-load" (no sales charge) fund requires a
Finally, turning to an exchange-traded fund,
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