Investors search for yield in low-rate world

The Federal Reserve is almost certain to cut interest rates later this month, and it may not be the only rate cut this year. That means that investors who want the safety of a steady (and sizable) yield have to look for something other than long-term government bonds.

The yield on the benchmark 10-year US Treasury is hovering around 2% — the lowest level in nearly three years. Yields for German, French and Japanese bonds are in negative territory. In other words, investors aren’t expected to get any income from government debt.

“It’s absurd that you would give a sovereign government money and pay them to hold it for you,” said Patrick Healey, founder and president of Caliber Financial Partners, to CNN Business.

That’s one of the reasons why investors have recently flocked to investments that offer much higher yields.

Dividend-paying stocks are a good bet

The Dow Jones Utilities Average is now trading near an all-time high, and investors can take advantage of a boom in dividends by buying an S&P 500 index fund or ETF, noted Wayne Wicker, chief Investment officer at Vantagepoint Investment Advisers and ICMA-RC.

That’s because there are plenty of big companies in the S&P 500 that have solid earnings potential and also pay yields around 3% or higher, such as Qualcomm, Target and Xerox.

Wicker said another way for investors to add more income to their portfolio is to buy funds that invest in preferred shares — special classes of stock that pay higher dividend yields — and convertible securities, corporate bonds that eventually convert into stock.

Most big mutual fund and money management firms have ETFs for these types of investments, such as the Invesco Financial Preferred, Global X U.S. Preferred, iShares Preferred and Income Securities and SPDR Bloomberg Barclays Capital Convertible Bond ETFs.

Electric and water companies also pay big dividends. Several real estate investment trust ETFs are also beating the broader market and are not far from record highs, too. REITs also pay big dividends.

Healey says he likes real estate companies better than utilities as a yield play. He noted that utilities may not be as safe as they seem. The recent bankruptcy of PG&E is a good example of the risk in utilities.

Not all real estate firms make sense for investors, though. Healey thinks companies that run self-storage centers and cellphone towers will benefit from favorable trends.

Many younger Americans are renting apartments instead of buying homes — and many existing homeowners are “nesting,” or staying in current homes longer but doing more improvements. That means that people have a lot of stuff to store at places like Public Storage and CubeSmart.

And cellphone tower operators, which lease space to big wireless companies like Verizon and CNN parent company AT&T, are in peak demand as the telecoms all look to roll out new 5G networks. That’s a key reason why Crown Castle, American Tower and SBA Communications have soared this year.

But Healey said he’d avoid shopping mall stocks, for example, because of the massive shift toward digital commerce that has hurt many traditional retailers. He also is wary of corporate office landlords given the rise of WeWork.

Junk bonds may sound scary but could be worth the risk

On the fixed income side, two high-yield “junk bond” funds — the iShares iBoxx $ High Yield Corporate Bond and SPDR Bloomberg Barclays High Yield Bond ETFs — are trading near 52-week highs as well. They pay much bigger yields than government bonds.

Investors looking for good opportunities in the bond market should consider some high yield plays, but they shouldn’t go overboard, said Matt Toms, chief investment officer of fixed Income at Voya Financial.

After all, they are called junk bonds for a reason: They are riskier.

Toms said companies with credit ratings of B or BB by Moody’s and Standard & Poor’s — i.e. the least likely in the junk bond category to actually default — have performed better in recent weeks and make the most sense for investors to own.

“These bonds satisfy both a need for yield as well as mitigate any investor apprehension about increasing credit risk,” Toms said.

Still, it pays to get paid in a time of global economic uncertainty. Investors may continue to seek out stocks and bonds that will pay them a steady income stream.