XS
SM
MD
LG
XL dev

Seeking Higher Yield in a Low Interest Rate Environment? Here Are 6 Ideas

Interest rates have been low for quite some time, and if Federal Reserve projections hold true, they’ll continue to be low for a while. How might you get a yield bump in such an environment? Here are a few ideas—but remember the risks.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Yield: Seeking high-yield investments during low interest rates
5 min read
Photo by Getty Images

Key Takeaways

  • Interest rates are likely to stay at rock-bottom levels

  • Higher yield typically means greater risk

  • Corporate bonds, sovereign bonds, and dividend-paying stocks offer alternatives when interest rates are low

It’s hard out there for fixed-income investors, with the 10-year U.S. Treasury yield hovering below 1% through most of 2020, and the front end of the yield curve near zero.

It’s not likely to get better anytime soon, considering Federal Reserve Chair Jerome Powell said at the June 2020 Federal Open Market Committee (FOMC) meeting that the Fed is “not even thinking about thinking about raising rates.”

Viraj Desai, senior portfolio manager at TD Ameritrade, said some investors are taking solace in strong total bond return, and he pointed out bonds have “put up exceptional numbers.” Even in conservative portfolios investors have experienced above-average performance due to strong returns across bonds.

But that’s not likely to last, especially with interest rates as low as they are, Desai explained. If the Fed decides to embrace negative rates, these bonds might do well from a total return standpoint. However, Powell hasn’t shown much appetite to take interest rates negative, unlike in Europe or Japan.

Are you a fixed-income investor looking for the best investments for a low-rate environment? You might need to rethink how to generate income and construct a portfolio to get a return that modestly outpaces inflation. That might mean taking on a little more risk. There are several ways to approach reassessing a fixed-income portfolio, and it may take using a few of these alternatives to construct the type of income you seek.

And remember: In general, the higher the yield, the more risk a security has. Higher yield often acts as a sort of “compensation” for taking on more risk. Keep that in mind as you consider these six ideas to increase yield. 

  1. Look further out on the yield curve

    Investors who want to stay with U.S. Treasury bonds can extend duration to get higher yields, so instead of owning 10-year bonds, you might buy 30-year bonds. Longer duration means higher sensitivity to interest rate risk.

    “If the Fed changes their mind and decides to turn really hawkish, those bonds are going to underperform versus where you were originally,” Desai pointed out. “The flip side of that is true. If things get worse, then bonds are going to do very well.”

  2. Consider corporate bonds

    Why invest in bonds when interest rates are so low? There are places to grab some additional yield—or more, depending on your risk tolerance.

    U.S. Treasury bonds are seen as the gold standard, but some investment-grade corporate bonds are also highly rated. Credit-rating agencies will rate investment grade corporate bonds from AAA to BBB. The lower in the alphabet you go, the higher chance for a default. Anything rated below BBB (BB+ down through the Cs) is considered high-yield, or “junk,” bonds and runs a very high default risk. Investors who go this route need to make sure they’re being compensated well for the risk they’re taking. (Learn more about junk bonds and bond ratings.)

  3. Non-rated bonds

    Investors who have time to dig in and research non-rated companies can sometimes be rewarded by finding diamonds in the rough. Desai noted that non-rated bonds are popular with active managers. Some companies forgo paying a rating agency (such as Moody’s, Fitch, or Standard & Poor’s) to issue a rating, and instead give that money in the form of a higher yield to investors. But doing it on your own takes some legwork, and there may be hidden risks that a typical investor might not consider.

  4. Emerging-market sovereign bonds

    The United States isn’t the only place with low yields for sovereign bonds—much of the developed world is in the same predicament. Some countries like Germany and Japan have bonds with negative yields. You could look at emerging markets, because these countries are still issuing higher-yielding government debt. Investors considering emerging-market sovereign bonds should treat them like high-yield bonds. Many emerging-market bond indices have below-investment-grade holdings. For example, the J.P. Morgan Emerging Market Bond Index has close to 40% of its bonds rated BB or lower. And there’s another risk with investing abroad: foreign exchange risk. Currency fluctuations can sometimes eat into returns. Again, that higher yield might be a form of compensation for taking on excess risk. 

    If foreign exchange risk is something you don’t want to add to your portfolio, these bonds also come in the dollar denominated variety.

  5. Dividend-paying stocks

    The dividend yield on the S&P 500 Index (SPX) is around 1.8% as of late 2020, according to S&P Dow Jones Indices. This is a quite a bit more than what U.S. Treasuries are paying, so some income investors are turning to divided-paying stocks. Many dividend-paying stocks are less volatile than the broader market, but these are still equities and are at risk of a sell-off if there is a broad-market break. Some dividend-paying choices include value stocks, blue chips, and real-estate investment trusts.

  6. Preferred stock

    Conservative investors who are less concerned about total return and more concerned about income can seek out preferred stock. In the seniority hierarchy (meaning the order of who gets paid in the event of a default or bankruptcy), preferred stockholders are right between debtholders and common equity. But unlike common shares, preferred shares typically have no voting rights. Preferred stocks tend to have less price appreciation and less volatility but often carry higher dividends.

Bottom Line on Seeking Yield in a Low-Rate World

These six types of income-targeting investments may take some reshaping of your investment portfolio. Desai suggested investors make a thorough examination of portfolio goals and objectives. 

“Is the goal income? Is it growth and income? Is it growth with some income? Weighing those two things often allows you to find the right mix of yield-producing assets that you can look to based on your risk tolerance,” he said.

It’s not just about finding the best investments for a low-rate world. It’s about finding the right portfolio mix for you. 

Print

Key Takeaways

  • Interest rates are likely to stay at rock-bottom levels

  • Higher yield typically means greater risk

  • Corporate bonds, sovereign bonds, and dividend-paying stocks offer alternatives when interest rates are low

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.

Payment of stock dividends is not guaranteed and dividends may be discontinued. The underlying common stock is subject to market and business risks including insolvency.

Investments in REITs and other real estate securities are subject to the same risks as direct investments in real estate, including loss of principal. The real estate industry is particularly sensitive to economic downturns. Be sure to consider your own financial situation, perform thorough research and consult with a qualified tax professional before making any investment decisions concerning REITs.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.

Scroll to Top