Stretching for Yield with ETFs
August 31st 2012 at 7:00am by Tom Lydon
Investors starved for income are gravitating to ETFs with high dividend yields. However, they shouldn’t forget that stretching for yield means taking on more risk.
“Since 1982, the average yield on 90-day Treasury bills has been 4.70%,” Russ Koesterich, iShares Chief Investment Strategist, wrote in a research note. “Today, investors would need to accept a substantial amount of both interest rate and credit risk to achieve a yield even approaching 5%.”
The Federal Reserve has pledged to keep interest rates low and much of the developed world is dealing with high debt levels. [Where to Find Yield in ETFs]
“This means that investors may be facing a low-yield environment for many years to come,” Koesterich added. “With demand for capital low and central banks determined to maintain real rates at or below zero, investors are likely to remain yield-starved for the foreseeable future.”
Meanwhile, investors have sought out dividend paying stocks to supplement their yields, and the yields may be rising. Dividend yields have just crossed their 20-year average – the S&P 500 currently yields about 2.1%, a little better than the 20-year average of 1.95%. [Dividend ETFs: Look Before You Leap]
While this may seem low, investors have to remember that it is relatively high compared to Treasuries. For instance, some may remember 4% dividends in the 1990s, but Treasuries were at 7% and corporate bonds gave out 10%.
“Today, equities compare much more favorably with their fixed income competitors, and even more favorably with cash,” Koesterich said.
For more information on dividends, visit our dividend ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.