Income investors have never had it so tough. It used to be a person could save and invest his whole life, taking on risk as he saw fit and then move to the safety of income investing at retirement. I remember the good old days when a person could get a CD and earn 5% or better. Well those days are gone. The Federal Reserve Bank (Fed) has slashed interest rates to nothing (their target is 0.0-0.25%) driving down the yields on everything from Money Markets to CD’s. This has income investors running scared. And they should be, the market crash of 2008 is all too fresh in their minds and they’re willing to do anything to avoid stock market exposure. Some are so scared they would rather invest in US government bonds, which are giving folks near zero and even negative yields. Can you imagine people literally so scared of the markets they’re willing to buy something that gives them back less money than they put in – this would be funny if it wasn’t so sad.
All of this is set against a backdrop of an ever-growing need among baby boom retirees for income. The largest generation the United States has ever known needs income and it isn’t coming from money markets, CD’s, or US Government bonds. The Siamese twins of safety and income investing have been separated. Investors are facing the new “normal,” characterized by higher taxes, a near-bankrupt social security system and higher medical costs. People are going to have to look for income in other places.
I’ve heard it said and said again that interest rates have to rise but they won’t, not as long as “Helicopter Ben” Bernanke is at the controls. In his early years, he made a speech where he proclaimed the Fed’s ability to push prices upward saying it was like a “helicopter drop” of cash conjuring images of him dropping cash out of a helicopter and earning him the nickname “Helicopter Ben”. The Fed will continue to print money and employ accommodative policies, which means the FED will continue to buy US government bonds, keeping yields low and forcing people into taking on risk to get the income they need. The only people accommodated by these policies are speculators and banks. Accommodative policies create moral hazard among speculators. Moral hazard is taking on undue risk knowing that someone will bail them out if things fall apart. The Fed has historically stepped into save speculators by slashing interest rates to re-inflate equity prices, which has come to be known as the “Greenspan Put”. Yes, it’s named after Alan Greenspan; he’s the same guy who gave us the real estate bubble and its subsequent crash. Of course, the banks are getting a free ride too. They get the benefit of borrowing for nothing (0.0-0.25%) and then re-investing it in the risk-free US government bonds. To put it another way, if I offered you a no-interest loan today and you could invest the money for a risk free 2.5-3% then you would be all too happy to take me up on my offer. So why do you think banks aren’t lending? They have a much safer way to generate real returns in what looks suspiciously like a deflationary environment.
If this weren’t enough, Congress in its infinite wisdom is considering allowing the repeal of the Bush Era tax cuts. Talk of balancing budgets and punishing the wealthy runs across news headlines but this couldn’t be further from the truth. A repeal of the tax cuts would be a severe punishment for the “average Joes” in the US. They stand to be hit the hardest by a repeal of the tax cuts. Consider that a 10% tax rate will increase to 15% in the lowest tax bracket costing them an additional 50% in taxes annually while the top line taxpayers will move from 35% top 39.6% a little over a 13% increase. These higher taxes are terribly regressive costing the poorest amongst us the most. Oh, it doesn’t end there, the Wall Street Journal reported that capital gains rates will go from 15% to 20% plus a new surtax of 5.4%, it was hidden in the House-health care bill, which accounts for an eye-popping 69% increase on long-term capital gains. Yeah, that sounds fair to me. I guess it’s another case of our representatives acting in our best interest.
So there are the problems laid out in a big stinking heap. We didn’t make the mess but we have to live with it. So, being that I’m a practical man, let’s look at solutions. There are several places that investors can find the income they’re looking for. High yield bonds, Master Limited Partnerships, Value stocks, and quality REITs are good places to start.
Some of these investments you may have heard of and others not. However, you decide to do it, I strongly urge you to thoroughly research before making any investments (or give me a call because I’ve already done it). Please call me to find a balanced approach to income investing.