To the dismay of income-oriented investors, intermediate-to-long-term interest rates have risen sharply since the Fed began cutting short-term interest rates on September 18. That’s not as anomalous as it might seem. The market figures that by stimulating the economy, the central bank will boost demand for capital, resulting in a rise in the cost—that is, the yield—of that capital.
But that explanation offers little solace to investors in the income categories listed in the accompanying chart. When yields of fixed-rate bonds and preferreds go up, their prices go down. Not all of the asset classes shown pay fixed rates, but an equally weighted portfolio of the six has posted a -0.57% total return since the day before the half-point cut in the Fed funds rate.
The Long-Term Perspective in Income Investing
This is a good time to remember, though, that successful investing for income is a long-term process. The chart’s second column shows strongly positive year-to-date returns for all categories, bolstered in each case by substantial capital gains. The equally weighted income portfolio has returned 11.33% through this point in 2024, with two months left to go. As one useful point of comparison, the S&P 500 has delivered a 7.62% annualized return in this century.
Focusing on Income Generation, Not Stock-Like Gains
Don’t expect income securities to beat common stocks every year, but that’s not the main objective in this strategy. The primary aim is to generate high current income. At the same time, you want to preserve your wealth and grow your interest and dividend stream over time, to offset the effect of inflation. That’s why the chart doesn’t depict a purely fixed income portfolio, but includes categories such as closed-end funds, master limited partnerships (MLPs), and real estate investment trusts (REITs). The distributions of all of these categories have the flexibility to increase over time.
The Power of Diversification in Income Portfolios
Spreading your income investments over a variety of categories provides an additional benefit: The chart shows that in the short-run market setback since September 17, convertibles delivered a decidedly positive return. A span of just a month-and-a-half is a far cry from the long term horizon that should be your primary focus. Still, the diversification benefit of a multi-category income portfolio can provide some peace of mind during those inevitable downdrafts.
