Two considerations for today’s income investors

The good news for income investors is that interest rates appear to be on the rise. As of February 16, 2017, the 10-year U.S. Treasury yield has risen over 100 basis points since its post-Brexit low of 1.38% on July 5, 2016. These increased yields should help some investors reach their income targets.

The bad news is that the search for income is still challenging. A 2.45% yield on the 10-year U.S. Treasury note (as of Feb. 16, 2017) still does not represent a lot of income. And if bonds have been a primary source of income, then the fourth quarter of 2016 would not have been encouraging: the Bloomberg Barclays U.S. Aggregate Bond Index was down -3%, marking its worst quarter since the third quarter of 1981.

Disappointing results and low yields can cause investors to seek other avenues for income, many offering the allure of higher returns as well. For example, in December 2016, U.S. high yield (Bloomberg Barclays U.S. High Yield Index), global high yield (Bloomberg Barclays Global High Yield Index) and emerging market debt (Bloomberg Barclays Emerging Markets Debt Index) offered current yields of 7%, 6.2% and 5.1%, respectively. Certain non-fixed income asset classes also offered competitive yields: MLPs (Alerian MLP Index) came in at 8.2%; global infrastructure (S&P Global Infrastructure Index) posted 4.3% yields and global real estate (FTSE EPRA/NAREIT Index) 3.8%.

However, these higher yields are not free: the downside risk can be substantial. Some investors may recall when MLPs (Alerian MLP Index) lost -32.6% in value for the calendar year 2015 when oil prices plummeted. As the chart below shows, the 2015 declines were not even the worst 12-month losses some of these higher yielding sectors have experienced: based on data going back to January 1994, MLPs, global real estate and U.S. high yield bonds have experienced 1-year downturns of -39.7%, -59.9% and -37.1%, respectively. In contrast, the U.S. Treasury Index’s worst 12-month return since 1994 was -3.6%.

Click on the images below for full view.

Yield chart 2017

Two considerations for income investors in the current environment

  1. Be cognizant of potential risks – they can be substantial, as the chart above illustrates.
  2. Diversify your income sources. While many investors are attracted to high-dividend paying stocks and high-yielding bonds, an over concentration in those kinds of assets can create unintended long-term risks. We believe that thoughtfully combining a broad range of equity, real assets and fixed income securities that have both income and growth potential may help income investors reach their targets.

Income diversification chart

The bottom line

With interest rates apparently on the rise, income-seeking investors may have an easier time meeting their income targets. That said, risks remain, particularly for investors who may have stretched for yield. Diversifying sources of income and thoughtfully combining asset classes that can provide both income and return may help investors navigate the uncertainty of the months ahead.

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Indexes are unmanaged and cannot be invested in directly.

Alerian MLP Index: a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. The index is disseminated by the New York Stock Exchange real-time on a price return basis.

Bloomberg Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

Bloomberg Barclays U.S. High Yield Index: Measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

Bloomberg Barclays Global High-Yield Index: An index which provides a broad-based measure of the global high-yield fixed income markets. The Global High-Yield Index represents that union of the U.S. High-Yield, Pan-European High-Yield, U.S. Emerging Markets High-Yield, CMBS High-Yield, and Pan-European Emerging Markets High-Yield Indices.

FTSE EPRA/NAREIT Developed Index: A global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

Citigroup 1-3 Month T-Bill Index: Tracks the performance of short-term U.S. government debt securities.

Barclays U.S. Credit Index: Comprises the U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. The U.S. Credit Index is a subset of the U.S. Government/Credit Index and the U.S. Aggregate Index.

Bloomberg Barclays Emerging Markets Bond Index: Includes fixed- and floating-rate USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. For the index, an emerging market is defined as any country that has a long term foreign currency debt sovereign rating of Baa1/BBB+/BBB+ or below, using the middle rating of Moody’s, S&P, and Fitch.

Barclays Long U.S. Treasuries Index: Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value.

S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

The Russell logo is a trademark and service mark of Russell Investments.

Copyright © Russell Investments Group, LLC 2017. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.

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