10 cents. That’s all $1,000 will buy anymore.

Savings and CD yields at several major banks have been stuck at .01% for the year, and don’t appear to be rising any time soon. JP Morgan Chase CD rates are .01% whether you invest for one year or ten. If you are a “relationship customer”, you’ll double that and get .02%, or 20 cents on every $1,000 invested.

Can income investors still realistically

“live off their interest and dividends”?

Finding sustainable and reliable sources of income has been challenging.  Over the last decade, the landscape has changed dramatically; ten years ago, you could build a diversified portfolio yielding 4-5% per year. Today stock, bond, and real estate yields are 30-50% lower:

The idea of “living off the interest” is a tough one in this environment. During these low-income periods, investors who rely on the rule-of-thumb 4% are put in a position where they need to sell assets (i.e. principal) to meet their needs. Here’s the same chart with historical and current yields:

How did we get here?

When uncertainty is highest, safety is the most expensive. The financial crisis of 2008 required a ton of Federal Stimulus, driving bond prices up and interest rates down. Things never really got back to normal over the ensuing decade; Double Dip Recession fears, the European Debt Crisis, the Trade War etc. kept things uncertain enough that yields stayed low. Then COVID-19 hit the globe, pushing bond prices higher, and interest rates further downwards.

What's the solution?

Today’s investors who need income will need to be more flexible regarding their asset allocation:

1.       Get comfortable with risk: Savings accounts, CD’s and Treasury bonds offer between 0-1%. Meanwhile, inflation is clearly back and hurting purchasing power. To earn more, you can look towards high dividend stocks, real estate investments, or preferred stock, among other asset classes to try to keep up. As always, volatility is the cost of earning higher rates.

 2.       Try to maximize your fixed income sources: nobody wants to hear that they should work longer or delay social security, but that may be the best way to protect your income stream down the road. It’s easier to work in your 60’s than your 80’s (if you run out of money).

 3.       Limit investment expenses: commissions and fees can quietly eat up your principal, whether you’re investing in mutual funds or investment properties. Vanguard Pioneer Jack Bogle famously said “in investing, you get what you don’t pay for”

If you’re looking for a second opinion on your income strategy, give us a call at 530-487-1777 and we’ll be happy to look for ways to improve your plan.