Risk For Income Investors

09/29/2013 7:00 am EST

Focus: INCOME

Jack Ablin

CIO & Executive Vice President, BMO Private Bank

Market expert Jack Ablin discusses the risks faced by income investors and where he thinks they should be looking in today's environment.

SPEAKER ONE:  My guest today is Jack Ablin and we are talking about income.  Hi Jack, how are you doing?

JACK ABLIN:  Fine, how are you? 

SPEAKER ONE: Good, good to see you again.  Investors have sort of been on the fence with this whole income thing.  We have had a pretty good run with dividend stocks and the REITs did very well for a while and then started pulling back.  Bonds have been up and down.  Where do you think investors should look for income now? 

JACK ABLIN:  Well, I think that it has been a long journey here with bonds and I think no longer now we can rely on bonds for their steadiness, at least not bonds that have maturities beyond five years or so, so with that said, we have to look for other places.  In looking for income, there are really three sources of risk that you can take to get income; one is interest rate risk and that doesn’t seem like a good way to go.  The other is credit risk, and you know what, credit risk isn’t bad.  Credit spreads the incremental yield that investors require to lend to lower quality companies has come down, but I still think that credit qualities is reasonable; we are not seeing the delinquencies and defaults that we would see at the bottom of a cycle, and that is probably the best place to draw income.  I would say credit risk and if you want to hedge the interest rate risk there are certainly ways to short the treasury market or buy inverse ETFs. 

SPEAKER ONE:  What about the dividend paying stocks?

JACK ABLIN:  Not a bad place to be.  Over long periods of times, dividends have proven to be a great way to stay ahead of inflation as companies are able to raise prices and raise dividends along with costs. 

SPEAKER ONE:  Now we see a lot of technology stock paying dividends.  I read an article recently that the reason to buy Apple would be for its dividends, I’m like oh my gosh, I’m in a dividend world. 

JACK ABLIN:  You know the funny thing is you’ve got these technology companies with a huge free cash flow yields, among the highest free cash flow yields of all the sectors, and yet they are not reinvesting, they are not expanding, they may have stranded cash in other parts of the world as Apple has risen, but it’s a great way to give that cash back to the investors, especially if they don’t see any expansion opportunities. 

SPEAKER ONE:  Wonderful, well thanks for joining me. 

JACK ABLIN:  Thank you.

SPEAKER ONE:  Thanks for joining us at the moneyshow.com video network.     

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