Are Yields really Low? Or is it a Deception?!
Have you looked Everywhere?
by John Valentine, contributions by Genevieve Valentine

 From where I sit, there appears to be controversy surrounding the current low interest rate environment. Some have told me that generating cash flow in an income portfolio is nearly impossible because of low interest rates. Yes, people are struggling to find secure, consistent, income oriented investments. And yes, mortgage rates are roughly 5%, money markets are sitting at .75%, t-bonds at 4%, CD’s at 1.7% (www.yahoofinance.com & www.bankrate.com). However, our office prides itself on helping clients have a cash-flow/income predictability strategy and it is possible to have income predictability with high dividend equities and equities that have increased; yes, increased dividend yields, despite the current environment, for instance: Exchange Traded Funds (ETFs) or Closed End Funds. An ETF is a security that tracks an index, a commodity, or basket of assets, but trades like a stock on an exchange. A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering. The fund is then structured, listed, and traded like a stock on an exchange. These kind of investments create diversification within your portfolio. In addition, even in our current interest rate market, you may find certain  ETFs and Closed End Funds that are at a high yield rate.

This graph is hypothetical. There is no guarantee this price pattern would be followed and no assurance that any investment strategy will be successful. It is important to note, the distribution rate can vary greatly, year to year, and be substantiallyless than the assumed rate shown. This is not representative of any specific investment and future  distributions are not guaranteed.Investing involves risk including loss of principal. Investments may fluctuate so that upon distribution the investment may be worth less than original cost. Past performance is no guarantee of future results.

With the current market, we have seen the prices of stocks fall. As share prices drop, dividend yields increase, since dividend yield is a ratio of a company's dividend payout versus its current share price. Even with the recent rally, the S&P500 is well off its high of 1500. As we are writing this article, the S&P500 is barely breaking 1000 (source: Yahoo Finance, 10/14/09). Logic would lead most to conclude the dividend yield for the S&P500 to be historically high, but companies have been quick and decisive to preserve capital and in turn have been cutting dividend payouts through this recession. This is why our office is looking outside the stock dividend box to help clients continue to have steady and predictable cash flow. However, it is important to point out that there are still companies with strong balance sheets who continue to preserve their dividend payouts and in some cases increased it.  We have found many dividend paying equities providing cash flow. It is prudent for an advisor to look everywhere and find both secure, consistent income streams from both stock dividends and non-conventional instruments.

Finding the appropriate investment to meet monthly income needs can be an important part of achieving one’s financial objectives. For decades, fund companies have been focused on creating products that generate a steady stream of retirement income. At the core, these funds are portfolios that spread across asset classes in order to generate an income stream. The twist is to take advantage of the funds and other investments that might be nontraditional to actively project income stream, despite the low interest rate environment. It is time to look outside the box and utilize investments like ETFs or Closed End Funds that are currently providing annual income payouts that range from 3% to 12%, depending on how they're constructed. Of course, income payout plans, composition, and costs can vary.

 It is important for investors to visit websites like investors.com and yahoo finance to review the yields of non-conventional investments. Here are a few examples:

Example 1: Stock A with a current price of $80 pays a quarterly dividend of 1.25 or roughly $5.00 yearly produces a 6.25% yield.

Example 2: Investment XYZ (which is an ETF, which is investment in convertible bonds and foreign income investments) has a stock price of $15, with a 11 cent monthly payout, produces a 8.8% yield.  (Remember this is not the total return of your investment. Please reread Cash Flow vs. Total Return article, from our July/August 2009 Newsletter).