Interest rates are near historic lows and it appears that will remain the case for some time to come, as the Federal Reserve has signaled it will likely keep rates where they are, at least through 2014.
Traditionally, investors who sought income from their investments looked to bonds, but with prolonged interest rates so low, where can income-hungry investors look next?
While low interest rates are great for borrowers, they create challenges for savers and investors looking for income. With the Fed and other central banks projecting low rates for the foreseeable future, investors may need to change their approach to generating income from their portfolios.
Retirees, in particular, need income-generating investments so they may need to change the way they think about income from their investments.
Looking at “Total Return”
Two traditional approaches to generating income from an investment portfolio have been interest paid on bonds and dividends paid on stocks or mutual funds
In this ongoing low interest rate environment, investors now have a third approach to consider for generating income: creating a dividend stream as part of a “Total Return Approach” to managing investment portfolios.
The Total Return Approach takes this growth/gain into account, even though one doesn’t actually realize the gain unless the investment is sold.
The increased value of the investment over time can really help investors.
Advisors work with the retiree to determine a Total Return Approach by using a sustainable withdrawal rate that will allow the retiree’s investments to last for the rest of his or her life.
As with any investment plan, the withdrawal rate should be reviewed annually, and success depends heavily on how investments perform over time.
The key is to shift the way that we view income beyond just interest on bonds and dividends on stocks, and the total return approach can contribute to income with the expected growth/gain on investments.
As with any investment, no investment approach is a one-size-fits-all opportunity and it’s recommended that investors meet with an advisor to discuss their needs and goals.
