How to Earn Income in a Low Interest Rate Environment
By Sasha Cekerevac for Daily Gains Letter |
Historically, investors who are looking for income have bought bonds and other fixed-income investments to generate yield. This unprecedented level of monetary policy has pushed interest rates to historically low levels. This means that income from bonds will be extremely low, and after taking inflation into account, it will actually be negative.
The danger is that not only is an investor going to lose money over the long term, but they will also see dramatically lower prices for fixed-income instruments once interest rates start rising. At this point, investing in stocks that pay out a solid dividend yield makes sense as a prudent investment strategy.
At this point, many people may be hesitant to look at investing in stocks after such a strong move since 2009. Many companies have reduced their dividend yield as other people have been active in investing in stocks, pushing prices up.
What one should do is look out over the next decade and see which offers a more attractive option, bonds or stocks. With the 10-year U.S. Treasuries yielding 1.9%, the S&P 500 index dividend yield approximately 2.8%, and the potential for capital appreciation, the choice seems quite obvious to me.
Investing in stocks is advantageous when one looks to buy pullbacks over a long period of time. This allows for a higher dividend yield and a better entry point for accumulation.
With bond yields being at such a low level, inflation will eat away returns. However, if inflation were to occur, this would push up asset prices, including stocks. Once again, investing in stocks that have a solid dividend yield helps generate income, while partially protecting one from inflation. Bonds are the last place one should invest if inflation was rampant.
The difficulty with investing in stocks for the long-term is that no one can predict that far out into the future. At no previous time in history has anyone accurately been able to predict over a 10-year time horizon.
This is why looking at the dividend yield as a source of income in addition to potential capital appreciation is a stronger combination at this point and the reason for a continuation for investing in stocks on pullbacks over the next few years. Conversely, someone investing in bonds, at this point, will most likely see negative real returns with a very limited possibility for any capital appreciation.