The search for income in a near zero interest rate world
Updated: Jul 17, 2020
Brendan Greenwood CIM, QAFP, B.Comm | July 16, 2020
My grandfather developed Alzheimer’s later in his life and at every holiday dinner he would usually talk about the same thing forgetting he had recounted these stories before. First it would be about his time in Italy during the war, reciting memories of conversations with locals in broken Italian and then it would turn to how he had bought an annuity years ago with a 17% rate of return and that my grandmother would never have to worry about income.
You’d be hard pressed for that to be true today with the Bank of Canada rate near zero, the yield on a 10 year government bond pays less than 1%. $10,000 in annual income on $1 million isn’t going to provide for a very comfortable retirement. Low interest rates have continued to fuel demand for riskier assets. The trend continues to drive up equity valuations and saddle investors with the burden of greater volatility in their portfolios. This is a real issue in retirement when drawing income in a down market can leave you with less money.
Momentum stocks have been on a tear with valuations heading towards numbers we saw prior to the dot com bubble. If the negative 2020 revenue outlook comes to fruition valuations will surpass what was experienced prior to the dot com bust.
Bonds have often been used to minimize portfolio risk but with interest rates near zero they do not provide the yield they once did and exposure to longer duration bonds could hurt return if interest rates rise. Gold is also often used as a hedge in portfolios. The value of gold can be very volatile moving up and down sharply, plus it provides no yield. These factors make it less than an ideal investment for most people in or approaching retirement.
So how can an investor generate a decent retirement income without too much risk. It is well known that stocks that are less sensitive to the economic cycles like consumer defensive and healthcare stocks can provide more stable returns. However, these stocks don’t always pay the largest dividends. To create further diversification and reduce the risk in your portfolio consider adding infrastructure. There are many investment options today, including mutual funds and exchange traded funds that make it easier to access this asset class. Infrastructure investments can provide exposure to a diversified mix of assets in areas such as real estate, transportation and utilities.
The asset class offers:
- Higher yields then most fixed income alternatives
- Portfolio diversification through lower correlation to other asset classes
- Less susceptible to competitive forces due to monopolistic nature of asset class
- Significant investment required means assets are meant to last long-term and can provide stable long-term revenue streams
- Funds from operations could increase due to lower interest rates (increased profitability)
- Current economic environment incentivises governments to spend on infrastructure projects to spur the economic recovery fueling investment growth
If you are looking to reduce downside risk and enhance income from your investment portfolio, an advisor can help with strategies that will create more predictable outcomes for you.
Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.
For other articles authored by Brendan Greenwood on issues impacting business owners and investors see https://www.greenwoodwealth.co/blog.
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