By Michael A. Pollock
By gradually lifting short-term interest rates, the Federal
Reserve has made it easier for retirees to get steady investment
income while taking less market risk.
But only up to a point. Because rates remain low by historic
standards, it still isn't possible for retirees to base their
investment strategies entirely on cash or other relatively safe
sources, investment professionals say. Instead, they need to own
some combination of bonds or bond funds, dividend-paying stocks and
other noncash assets to get both cash flow and the appreciation
they'll need to make it more likely they won't outlive their
assets.
In creating that mix, it is also important to consider the
current financial climate, which has grown riskier as the Fed has
stopped pumping as much money into financial markets and the
economy. Retirees in particular should make sure they are using
some conservative income strategies -- such as owning high-quality,
dividend-paying stocks -- that will provide a dependable source of
cash flow regardless of how the economy fares during the next phase
of the market cycle, professionals add.
For those who want to review their portfolio mix and incorporate
some more conservative income strategies, here are some suggestions
from financial advisers.
-- Hold more cash, but with a better yield. Besides being key
from a spending perspective, a cash stash also can figure into an
overall portfolio strategy, says Tom Stringfellow, president of
Frost Investment Advisors, San Antonio. Keeping 15% or a little
more in cash may soften the impact of gyrations in the equity area
of a portfolio, making it easier for an investor to ignore
volatility and stick with the plan, he says.
Many high-yielding bank money-market accounts currently yield
under 2.5%, which is less than an investor might get from bonds or
some stock dividends. To do better, investors might consider
putting cash that isn't needed immediately into a bank certificate
of deposit. CDs pay more than most money-market accounts, but often
levy a penalty if a saver withdraws funds before maturity.
Eighteen-month CDs, which have yields nearer to 3%, are the best
right now from a term and rate standpoint, says Jeff Carbone,
managing partner at Cornerstone Wealth, in Charlotte, N.C. He
suggests creating a ladder, buying a new 18-month CD every six
months and reinvesting the proceeds as each matures. That enables
an investor to tap higher CD rates while providing cash that can be
spent or reinvested whenever one matures.
-- Buy high-grade corporate bonds. Savings rates will decline
again as the economy eventually cools and the Fed starts lowering
rates again. But short-maturity corporate bonds probably will
continue to generate decent yields, says Jim Barnes, director of
fixed income at Bryn Mawr Trust. While their principal value will
rise or fall on news affecting an issuer or the broad bond market,
such bonds can offer a relatively conservative play if they carry
investment-grade credit ratings, triple-B or higher, Mr. Barnes
says. Many yield north of 3% now.
He cautions against loading up on lower-rated, so-called
high-yield corporate bonds, though. While they yield much more,
their prices can tank in scenarios where investors are stampeding
from risk. In last year's fourth quarter when stocks plunged, the
SPDR Bloomberg Barclays High Yield Bond ETF (JNK) lost about 5% in
price.
Vanguard Short-Term Corporate Bond (VCSH), an investment-grade
ETF that holds Morningstar Inc.'s second-highest silver rating,
charges 0.07% in annual fees. Morningstar gives its next-highest
rating of bronze to the SPDR Portfolio Short Term Corporate Bond
ETF (SPSB), which also charges 0.07% in fees. Both yield nearly
3%.
Some advisers believe it is less risky to use active managers in
the corporate bond space. One with Morningstar's highest gold
rating is Dodge & Cox Income Fund (DODIX), which yields about
3.4% and recently held more than 40% of its portfolio in corporate
bonds.
-- Look for alternatives. Preferred shares rank in between
common stock and bonds in the asset spectrum with regard to balance
between returns and safety. They trade like stocks, but make
regular payouts like bonds. And when companies make payouts,
holders of preferred -- as the name suggests -- get preference over
holders of common stock.
Rates on preferred shares can be attractive. The iShares U.S.
Preferred Stock ETF (PFF), with about 46% of its portfolio rated
triple-A, yields around 5.3%. Invesco Preferred ETF (PGX), whose
portfolio predominantly comprises low-investment-grade securities
rated triple-B, generates about 5.4% in yield.
Although preferred shares pose lower risk than some other income
plays, they aren't without risk, says Doug Cohen, a managing
director at Athena Capital Advisors, Boston. A key concern would be
a big rise in long-term yields -- those rates that tend to be
influenced more by fear of inflation than by modest changes in Fed
policy. If long-term rates go up, principal values will drop, Mr.
Cohen cautions.
-- The argument for equities. If the economy and corporate
profits grow more slowly, stocks certainly won't boost portfolios
as much as in recent years. But only equities can give investors a
reasonable cushion over U.S. inflation, which is broadly around 2%
and may be higher for older Americans because of the escalating
costs of items such as pharmaceuticals. "It's important to get
returns that clear the inflation rate so people aren't being robbed
of purchasing power," says Hans Olsen, chief investment officer at
Fiduciary Trust Co., Boston.
Financial-data provider CFRA gives high ratings to both Vanguard
High Dividend Yield (VYM) and iShares Core High Dividend (HDV),
ETFs that both generate yields above 3% by investing in blue-chip
dividend payers such as Johnson & Johnson (JNJ) and Exxon Mobil
Corp. (XOM).
Todd Rosenbluth, who heads ETF and mutual-fund research at CFRA,
says that because of the bigger income component these
higher-yielding ETFs contain, they also decline less at times, like
last fall, when stocks are tanking.
People who don't care as much about an income stream, Mr.
Rosenbluth adds, instead might choose an ETF that owns companies
that raise their dividends consistently. Such ETFs have lower
yields -- maybe around 2%, compared with 3% or more for VYM and HDV
-- but the companies in their portfolios build capital and increase
their dividends over time.
"If you are concerned that the market is likely to weaken, the
higher-yielding dividend strategies are more appropriate" than
dividend-growth plays, he says.
Mr. Pollock is a writer in Ridgewood, N.J. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
April 21, 2019 22:22 ET (02:22 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.