Many of today’s retirees are facing an unfortunate scenario. To retire on time, they’ll need to turn their depreciated savings into extra income – at a time when the bond market could start faltering.
Over the past year, bonds have been a haven for many investors seeking alternatives to the low rates available in bank deposits and money market funds.
The result was appreciation in the asset classes that have performed well since the market’s rally began. Those include corporate bonds, high-yield bonds and emerging-market debt.
But the rapid appreciation of these sectors may be behind us because they tend to underperform in rising interest rate environments. That’s because when interest rates rise, the prices of existing bonds fall as newer bonds with higher rates are issued.
Although the U.S. Federal Reserve Board may still be months away from its first interest rate increase, fixed-income investors may want to start considering their options.
One option is investing a portion of one’s portfolio in dividend-paying stocks, which can provide a dependable income stream.
When a company earns profits, it often pays a share of those profits to its shareholders. These profits – called dividends – are typically paid by large, well-established companies that generate profits regularly but are too mature to grow significantly.
Granted, the recession was hard on dividend yields because it was hard on corporate profits. Companies cut payments, driving the average yield of stocks in the S&P 500 down to 2% in March 2001. That’s far below the historical average of 3.8%. But the trend may be turning as companies see their profits improve.
Dividend-paying stocks can be found in many sectors, such as utilities and consumer staples. You can also leave the hunt for dividends to mutual fund managers who specialize in that field, by purchasing shares of a dividend-focused mutual fund.