Amid paltry Treasury yields and S&P 500 dividend risk, advisors looking to generate income for investors are facing a host of challenges in 2020.
Low yields and coronavirus are certainly making a formidable roadblock when it comes to fixed income investors, but there are still some income-generating opportunities as well as multi-asset strategies that investors can utilize.
Advisors can reduce the income-generating burden via model portfolios, including those found in WisdomTree’s Modern Alpha Model Portfolios collection. Within that series is a group of seven multi-asset portfolios ranging from a risk tolerance level of very conservative to very aggressive.
The multi-asset model portfolios are “designed to help maximize income, offer capital appreciation potential and reduce volatility, this strategy typically provides exposure to a diversified allocation of dividend-focused stocks and yield-focused bonds using ETFs with global exposure,” according to WisdomTree.
The Very Aggressive Model Portfolio is true to its multi-asset directive. The 10 equity-based ETFs featured in the portfolios run the gamut of large-cap domestic dividend strategies to international equities, including emerging markets, to covered call funds, and master limited partnerships (MLPs).
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options.
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
The fixed income side of this model portfolio features exposure to Treasuries, high-yield corporate bonds, and preferred stocks.
Preferred stock is a class of equity security that typically pay fixed or floating dividends to investors and have “preference” over common stock, but they are subordinated to bonds. The issuing company must pay dividends to preferred stockholders before common stockholders, and in the event of a bankruptcy or liquidation of the company’s assets, must put the claims of the preferred stockholders ahead of the claims of the common stockholders.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
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.