Looking for Yield in All the Wrong Places

Rodney Johnson | Wednesday, December 5, 2012 >>


For those of you that had a country song pop into your head when you read that subject line, you’re not crazy.

Back in the early 1980s, the movie Urban Cowboy was popular and included the song, “Looking for Love in All the Wrong Places.” Today, it seems many investors are doing the same thing… but love is not the goal… it’s yield.

The Federal Reserve has done its best to punish savers. It’s driven down interest rates and ruined portfolios that were based on solid, conservative, fixed income investments.

Want to build a portfolio of U.S. Treasuries to retire on? Good luck!

A portfolio split between 10-year and 30-year bonds will yield a paltry 2.45%. That’s before taxes. At 15% (at least for a month or two!), the interest on the bond would drop to 2.0825%. Wow. That’s impressive. Invest money for 20 years on average and barely earn the rate of inflation.

Unfortunately the bad news doesn’t stop with U.S. Treasuries…

Any high quality bond is in the same situation – there is very high demand, so there is very little yield. It’s as if the world is using these high quality bonds as simple parking spots for cash. They don’t care what the yield is.

But individual investors care very much about what the income is because that money can mean the difference between comfort and simply enough to get by.

Of course there are alternatives to the traditional high quality bonds…

Investors can buy Brazilian bonds, or junk bonds, or maybe even Master Limited Partnerships (MLPs). Then there are preferred stocks, dividend stocks and REITS that can also help. And don’t forget to consider emerging market debt…

It’s typically at this point that many investors get a little nervous. What began as a search to replace low-yielding, high-quality bonds has suddenly turned into a research project with too many risky answers.

It’s really easy to say “streams of income,” or “diversify the risk,” but when it comes right down to it, knowing how to do this in the world of bonds or alternative income securities is hard.

Stocks are straightforward. Intel and Alcoa are different. Visa and MasterCard are pretty similar.

But bonds? Preferreds? MLPs? Yeah. Right.

Well, you can stop looking for yield in all the wrong places because this is where a good idea fills an obvious need.

Any reader familiar with our work knows we write often about streams of income. We recognize the pickle that income investors are in thanks to Ben Bernanke and Co.

But we also recognize the difficulty in branching out from the traditional income investments of bonds or even bond unit investment trusts. That’s why the new offering from EverBank Wealth Management, Inc. holds such promise.

EverBank Wealth Management continues to evaluate the marketplace and develop offerings that fit what investors are looking for. Right now, that’s yield. So in answer to the call, EverBank Wealth Management created the Enhanced Yield portfolio. It is a portfolio of mutual funds and ETFs with exposure to not only bonds, preferred stock or MLPs. It is all of these at once…and then some.

EverBank Wealth Management has created a portfolio of holdings put together in such a way as to diversify the risk of any one type of security as well as the risk of one area of the world. This takes the pressure off of investors trying to do it themselves.

With that said, the portfolio still has risk, no doubt. The Fed and other central banks have done their best to make sure investors get no free lunch in high quality investments. What EverBank Wealth Management has done is give investors a huge leg up in creating a portfolio that replaces some of the lost yield while working to hold down the risk.

It’s like having the geek in high school do your homework for you. There will still be a grade at the end, but there’s a better chance of earning higher marks.

Rodney

P.S. For the sake of transparency, note that we have a relationship with EverBank Wealth Management and may be compensated if you open an account with them. Regardless, we would recommend the products we feel you could benefit from. You can find out more about EverBank’s Enhanced Yield Portfolio here.

 

 

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The Yield Party isn’t Over

We’ve harped on about building streams of investment income for years now and the popularity of this trend has recently gained momentum. That’s led more than a few skeptics to wonder, “Is a dividend bubble forming?”

 

 

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.