Displaying items by tag: income
With interest rates so low there has been increasing interest in the role that annuities can play for those near or entering retirement. Bonds just aren’t playing the dual roles of safe haven and income source that they once did, and annuities are a naturally inheritor of that role for the foreseeable future. However, one thing that many are not clear about is how well fixed and variable annuities can work together. While fixed annuities offer guaranteed income, they are susceptible to inflation. Accordingly, many retirees might also want to have some upside that will allow their payouts to move higher. Enter variable annuities, which can offer enhanced income in up markets (but do risk lower payments in down markets).
FINSUM: Fixed and variable annuities work well as a pair. The portion invested in fixed offers guaranteed income, while the variable portion offers upside potential.
Here is a non-sensical but fully logical sentence for you: bonds just aren’t “bonds” right now. What we mean is that bonds simply aren’t fulfilling their long-understood role any longer. They yield very little and have a great deal of risk—both the opposite of their traditional role. So where can advisors turn? One increasingly interesting area is annuities, and fixed index annuities in particular. They offer the downside protection investors need, and upside participation everyone wants. Principal is never put at risk to the market, but interest from the initial purchase is used to participate in upside. In other words, you have principal protection with some upside potential—just like bonds have traditionally been used.
FINSUM: Fixed index annuities seem to be a very good alternative to bonds in the current environment.
The market has been extremely volatile this year and that has put many investors on edge, especially those nearing retirement who need to rely on their portfolios for regular income. Treasury yields have gotten so low that they are not a good source of yield. So where to turn? One option is fixed annuities, also called multi-year guaranteed annuities. In contrast to fixed-index annuities or equity-index annuities, the return on MYGAs is not tied to an index. Such MYGAs are currently offering spreads of as much as 300 bp over Treasuries, representing a strong opportunity for those who need guaranteed income.
FINSUM: Two things to bear in mind when considering these—they are generally quite illiquid as the money is “locked up”, and secondly, they do have default risk but often can have limited losses because of state guaranty associations.
Dividends have had a tough year. Because of the pandemic, many companies have had to cut their dividends in the face of losses or declining profitability. Even some who have maintained or raised dividends cannot really afford to do so. Therefore stable, rising dividends with healthy underlying companies are very prized right now. Here are some good names to look at: Whirlpool, Avery Dennison, American Electric Power, and Crown Castle International. All four have recently raised their dividends on the back of robust business. Whirlpool, a major appliance manufacturer seems to be riding the home improvement wave, while Avery Dennison, which makes packaging, is likely benefitting from ecommerce gains. The others (a utility and a cell tower company) have inherently durable businesses.
FINSUM: Cell towers, utilities, and packaging materials seem like very strong areas even if the pandemic gets worse this winter, and there is almost zero rate risk at present.
The yield environment is a terrible one for anyone who is seeking income from their investments, especially those in retirement who may be living on a fixed income. So where can investors seek strong domestic yields? Check out mortgage REITs. Mortgage REITs have long offered some of the highest yields in markets because of the leverage they utilize. Most of the group have yields over 10%. Look at the following names as an example: AGNC Investment Corp. (AGNC, yield 10.2%), Annaly Capital Management, Inc (NLY, 12.9%), Anworth Mortgage Asset Corporation (NH, 14%), and Armour Residential REIT (ARR, 12.3%).
FINSUM: So obviously mortgage REITs have significant interest rate risk, but can you imagine a period where interests rates seem less likely to rise?