Many looking for yield search for the highest yielding investments but Retirement Watch's Bob Carlson shares his reasons why this may not be the best strategy.
JOHN RANSOM: I’m John Ransom for the MoneyShow joined by Robert Carlson, editor and CEO of Retirement Watch. You know Bob, right now people are reaching after yield because interest rates are so low. How do seniors maximize their yield, maximize their income in this low-interest rate environment?
ROBERT CARLSON: Yeah, it’s a big question. It’s one I hear about a lot and there are different things you can do. What you don’t want to do is reach for the highest yield because that’s going to be the riskiest investments and it’s going to be ones that decline the most when interest rates go up. I’ve recommended several different things for people to do. One is they can focus on closed-end funds that have gone down in value recently, are selling at decent discounts. They will pay higher yields than traditional investments and they’re fairly safe if you buy them when they’re down and when they’re at discounts. Another strategy you can take is move your conservative investments such as bonds and CDs into annuities, fixed, deferred annuities. These will pay you a yield similar to intermediate bonds. The yield will go up and down from year to year based on what’s happening with interest rates, but your principal is safe. If you buy a traditional bond, when interest rates go up, the value of your principal’s going to go down but if you buy a deferred annuity, your yield will go up with the market but your value will stay the same. It won’t decline the way it will on a bond.
JOHN RANSOM: Is there a specific closed-end fund that you guys are looking at right now?
ROBERT CARLSON: We’re looking at several funds. We’ve been invested in an Eaton Vance tax-exempt fund for about a year now. Municipal bonds went down in 2013 when interest rates went up and when Detroit declared bankruptcy and so that’s generated a high yield. It’s about 6% yield that’s tax free and it’s also gone up in value. We’ve also been focused on real estate investment trusts and preferred stocks and there’s one closed-end fund called Cohen & Steers REIT & Preferred Income. It’s about half real estate investment trust, half preferred securities; it’s leveraged a little bit about 20%, 25% so it yields about 8%. It’s been going up in value because the REIT portion of it’s been going up in value so it’s been a very good combination of yield and capital gain.
JOHN RANSOM: So one other advantage of a closed-end fund is that you can buy it at a discount to its net asset value so therefore your yield is a little bit higher than it normally would be if you bought those instruments yourself on the open market, right?
ROBERT CARLSON: Right and the Eaton Vance fund is a good example of that. It was trading at a premium back in 2011 and 2012 so you were paying more than a dollar for each dollar of assets but after it collapsed in 2013, it was actually selling at a discount so you’re getting a dollar of assets for less than a dollar of your investment.
JOHN RANSOM: Well I appreciate you coming by the MoneyShow San Francisco. Thanks so much, Bob.
ROBERT CARLSON: Thank you for having me.
