SAN DIEGO (ETFguide.com) Low interest rates have become a major
public enemy. And the Federal Reserve has pledged to keep rates
deflated until 2014, which means the problem of generating adequate
income will only persist. How can you get more income?
Chasing High Yields
Investing in bonds is a popular method for generating income, but
many bond investors have strayed far away from their goal of "safe
income" by increasing their risk.
The number of low cost exchange-traded funds or
ETFs
following exotic debt from emerging market countries (NYSEArca:
PCY) is growing. Although many of these countries have fast growing
economies, they have less experience at managing financial shocks
compared to developed nations.
Other bond investors are piling into lower quality debt to
squeeze more yield or income from their investments. "Junk" bonds
(NYSEArca: HYG) are high risk debt issued by corporations with a
spotty credit score. It's almost like lending money to your cousin
Vinny who never pays on time, except when Vinny misses a payment,
you can put a brick through his window because you know where he
lives.
Some investors have increased their risk by extending the
duration of the bonds they own.
For example, short-term Treasury bond ETFs like the iShares
Barclays 1-3 Yr Treasury ETF (NYSEArca: SHY) and the iShares
Barclays Short Treasury Bond ETF (NYSEArca: SHY) have a 12-month
yield of just 0.77% and 0.07% respectively. These depressed yields
have induced more than a few people to pile into long-term U.S.
Treasury bonds (NYSEArca: TLT), which carry yields in the vicinity
of 3.40%. What they don't know is that long-term bonds are more
susceptible to price declines when interest rates increase along
with inflation.
Depressing CDs
Bank certificates of deposit (CDs) are a type of deposit account
with a bank or thrift institution that typically offers a higher
rate of interest than a regular savings account. CDs carry federal
deposit insurance up to $250,000 and the interest rate is generally
fixed for a certain period. Despite these assurances, today's CD
yields aren't high enough to earn investors any substantial cash
flow.
Locking away your money in a 5-year CD at today's average annual
yield of around 1.41 percent is a sure way to lose the buying power
if interest rates creep higher. Furthermore, it would take you
approximately 49.5 long years to double your money at 5-year CD
rates!
Parking money in a CD is the easy part, but taking it out can be
another story. Many people forget the maturity dates for their CDs
and are later shocked to learn that they have tied up their money
for five, ten, or even twenty years. Some CDs will automatically
renew at maturity if you do not withdraw your money. A lack of
liquidity is another overlooked problem with CDs.
Top Yielding Sectors
Investing in high paying dividend sectors is another way to grab
more income. Historically, investors have flocked to industry
sectors like utility stocks (NYSEArca: XLU), real estate investment
trusts (NYSEArca: ICF), and master limited partnerships (NYSEArca:
AMLP).
This particular strategy has caveats. No matter how juicy
dividends from individual stocks or sectors may appear, dividends
are never guaranteed to remain the same and other hidden problems
can suddenly arrive.
From 2004-07 investors were piling into high yielding mortgage
REITs (NYSEArca: REM) because annual yields in some instances had
topped 16%. In 2008, mortgage REITs as a group sank 42% in value
and shareholders in certain individual mortgage REITs were
completely wiped out because their companies went bust. What kind
of broken income strategy is that?
Conclusion
In this type ofdepressed interest rate environment, the smart
income investors are employing other ways to generate income. They
realize the traditional income sources alone are no longer cutting
it.
Instead of chasing high yielding ETFs, the
ETF Profit Strategy Newsletter
uses a time-tested strategy that institutional investors have been
quietly using for decades. We built a $100,000 all ETF investment
portfolio that's an absolute cash cow. And with a few simple moves,
our May income trade generated over $760 in monthly
income.