Boost your income…even when rates are low
Provided by RBC Wealth Management and The Neuman Wealth Management Group
When you’re investing for income, you want as much of it as possible. So with short-term interest rates at historic lows, you may be feeling somewhat frustrated at the cash flow coming from Certificates of Deposit (CDs), money market accounts and other income-producing vehicles.
Unfortunately, unless you’re a member of the Federal Reserve, you can’t change interest rates. Fortunately, you still have some options for increasing the income from your investments.
For starters, you may want to consider investing in longer-term bonds or other fixed-rate, income-producing investments. Generally, these longer-term vehicles pay higher yields than shorter-term ones. But as is usually the case in the investment world, this higher potential reward comes with greater risk. Longer-term bonds pay you higher rates to compensate you for incurring both interest-rate risk — the possibility that interest rates will rise, causing the value of your bonds to fall — and inflation risk — the danger of losing purchasing power by the time your long-terms bonds have matured.
With interest rates so low, though, you may be willing to accept these risks to get significantly higher yields. However, you could get a smaller “bump” without locking up your funds for five or ten years. Rather than sticking with, say, a money market account that pays an extremely low rate, you could pick up some yield by investing in an ultra-short or short-term note or bond investment, assuming, of course, that such an investment is appropriate for your risk tolerance and need for diversification.
Apart from lengthening the duration of your fixed-rate, income-producing investments, you might also look at the credit quality of these types of vehicles. As you may know, those bonds that receive the highest “grades” from credit-rating agencies — and are therefore considered the least likely to default — typically pay the lowest interest rates. Conversely, bonds with lower credit ratings pay higher rates.
But how low should you go? You may want to avoid the riskiest bonds, sometimes known as “junk.” But if you don’t require the interest payments for your daily living expenses, you might be able to withstand a higher degree of credit risk, which may be accompanied by fluctuations in the value of your principal. And these fluctuations may not particularly concern you if you plan to hold your bonds until maturity, when you’ll receive all your principal back, except in the rare case of default.
Thus far, we’ve only talked about ways to potentially add income from fixed-rate investments, such as bonds. But you also might be able to increase your cash flow by investing in dividend-paying stocks. Some companies have paid, and even increased, their stock dividends for many years in a row. (Keep in mind, though, that companies can reduce or discontinue dividends at any time.) If you don’t need to take the dividends as cash, you can reinvest them into the stocks, thereby building your share ownership.
So there you have them — some ideas for “ratcheting up” your income even in a low-rate environment. If these suggestions are appropriate for your situation, consider talking about options with your financial advisor, and putting them to work soon.
This article is provided by Rhett Neuman, CPF, a financial advisor at RBC Wealth Management in Stillwater, MN, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.
RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC