As bond investors go, I tend to focus on what can go wrong more than most, so when I looked at the cover of Barron’s today, I said, “Oh, no. Pushing yield now?”
It’s no secret that most safe investment grade debt does not yield much now. Many investors, hungry for yield, must look for other ways to earn income, even if it means greater hazard of capital loss. That is another impact of the federal reserve flooding the debt markets with liquidity — the safe investments yield little, forcing those that want yield to take significant risks, whether those risks are lending long, high credit risk, operational risk (common stock and MLP dividends), or subordinated credit risk (preferred stocks).
The history of chasing yield is not promising. In general, average retail investors reach for yield at the wrong time, and Wall Street is more than happy to facilitate that through structured notes and other high yielding investments where the risk is greater than the excess yield.
But wait — I can endorse some of the article. I like utilities here. I don’t own Verizon (NYSE:VZ) or AT&T (NYSE:T), but I could imagine owning them. MLPs in energy distribution? Probably safe; consider their competitive positions and consider where things might go wrong. I’m not jumping to buy them, though.
Where I can’t sign on is with preferred stocks and convertibles. All of the preferred stocks that the article cites are financials with marginal investment grade ratings. The convertibles are from a grab bag of low junk-rated securities.
How quickly we forget the ugliness of 2008. If we have a second dip in the financial economy for whatever reason, the preferred and convertible securities will do the worst. In order to get significant yields one must take credit risks in excess of average loss costs — it is safe to say at times like this, the purchase of risky securities is not rewarded. Be wary with all purchases of risky debt at present.