This leaves investors with the same challenge they’ve faced for the past five years: how to source yield in a low-yield environment. High yield bonds, which have outperformed the broader bond market year-to-date, could be a good option within fixed income.
Investors should also look to broaden their search for income beyond bonds. This suggests a greater emphasis on dividend-paying stocks, with an important caveat: Focus on dividend growth rather than the absolute level of yield. Many equity sectors offering high yields (such as utilities) are expensive and the most vulnerable to a rise in rates. Instead, yield-hungry investors can consider technology, financial, health care and select energy companies offering rising dividends.
Sources: Bloomberg, BlackRock
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.