Ideas to Create An Attractive Income Stream in a Low Interest Rate Environment

By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management

It can be difficult to balance the need for income while also providing thoughtful market exposure in low interest rate environments. Among the commonly used income strategy options, there are two broad strategies that are equally unappealing in our view.

In the search for yield, investors can move too far into equity income strategies that are heavily focused on narrow sectors, such as utilities and telecom. While these portfolios may offer an attractive yield, they tend to be concentrated in equities that can quickly become to be highly volatile. Similarly, we see fixed income strategies that are overly concentrated in high-yield bonds. Here too the search for yield can pushed investors into an area that can quickly prove to be quite scary. We believe that sensible and thoughtful diversification across many sources of income is the key to delivering consistent yield while still protecting principle.

For example, we look for domestic and foreign equity allocations that focus on consistent dividends while also maintaining diversification across equity sectors, such as health care and consumer, rather than relying heavily on utilities and telecom. This helps mitigate the risks that are associated with other, more sector concentrated, equity income strategies.

In the traditional fixed income space, we favor high-quality, short- and intermediate-duration corporate bonds as they offer consistent and stable income. Furthermore, we think high quality mortgage-backed securities provide value over time and are an important fixed income sector. In addition, we think that taxable municipal bonds offer high quality, liquid investments with attractive yields compared to the current level of long-term Treasury interest rates.

In this environment, we think that looking at alternative sources of income is especially important. The solid U.S. economy with rising short-term interest rates favors tactical positions in bank-loans and other floating rate instruments. Furthermore, we think that preferred stocks provide good relative value compared to other income producing sectors while variable rate preferreds can mitigate some interest rate sensitivity. The energy sector is one of the most attractively priced areas of the U.S. market based on normalized earnings and we think that MLPs can offer a nice current yield. Lastly, a diversified allocation to closed-end funds can provide offer a healthy yield in this environment.

The long-term goals of an investor are the most important factor and the first step in developing a portfolio. However, we think investors tend to unintentionally expose themselves to greater risk by focusing on unrealistic and unsustainable income streams that can quickly derail their investment journey. We think that by carefully diversifying across many sources of income as described above, investors can capture an attractive income stream while maintaining capital preservation.