Generating Income in an Uncertain World

11/28/2011 12:01 am EST

Focus: MARKETS

Jack Ablin

CIO & Executive Vice President, BMO Private Bank

Investors reading newspapers these days are greeted with a daily dose of market-moving headlines, each one more ominous than the last. One day's panic is followed by the next day's jubilation. The Dow's daily market swings routinely exceed 200 points and have exceeded 400 points more often than we'd like to admit. 

The market environment has gotten so risky that income investors have been forced into the safety of Treasuries where yields are situated below the rate of inflation. This means that anyone relying on the income from today's 10-year Treasury notes to meet their spending obligations is virtually assuring themselves of a lower living standard over the next decade. 

With an adequate time horizon there are several income options available to investors.  High yield bonds, for example, offer compelling yields when gauged against Treasuries. High yield bonds represent loans to a lower quality borrower, but as long as the economy continues to trade sideways, credit conditions should remain intact.  Preferred stock, while considered equity, offers attractive yields. While this asset class can vary in price along with stocks, the attractive dividend keeps a lid on volatility. 

There are several yield-oriented alternatives to US Treasuries. Each one requires an adequate time horizon, diversification, and an understanding of the risks involved.  Together these instruments offer attractive income opportunities for investors.

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