Seeking yield in a low-interest, slow-growth economy

Local investment advisors take different approaches

While some investors were panicking or making investment changes in the days following Britain’s historic vote to exit the European Union, Dr. Janice Miller was sleeping soundly.

Miller retired last summer from her role as associate dean of the Lubar School of Business at the University of Wisconsin-Milwaukee and moved to Phoenix.

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Cantrell
Cantrell

The move, as well as what to do in a market correction like Brexit, were all part of the plan she developed with her financial advisor, Jim Cantrell.

Cantrell, CFP, founder and owner of Financial Strategies Inc. in Brookfield, takes a steady long-term approach to investing, she said.

“When they had the Brexit and people were going crazy, I thought, ‘Over the years with Jim, I’ve seen things happen and he has confidence things will turn around, and they always do,’” Miller said. “Some of it can be pretty alarming, but I think what I got from Jim is we developed a strategy and there was solid reasoning behind it and we stuck to it and I was confident in the rationale that my portfolio would be OK.”

Cantrell calls his approach his “sleep at night policy,” he said. He advises clients to have seven years worth of income on the safer side of their portfolio so they have plenty of room to wait out downturns instead of selling in a down market.

“If investing for longer term, ours is a non-market timing strategy,” Cantrell said. “Rather, we use time to try to insulate ourselves from the risk of the markets.”

But what if an investor is seeking yield more quickly in this slow growth, low interest rate environment?

Ellenbecker
Ellenbecker

Karen Ellenbecker, founder and senior wealth advisor at Ellenbecker Investment Group Inc. in Pewaukee, says the drive to get some interest or earnings from their portfolios is top of mind for her clients, many of whom are approaching retirement.

She takes the approach of splitting the portfolio in half. One half is put into a mutual fund that’s available as liquidity or income. The other half Ellenbecker invests in individual equities.

Ellenbecker targets the highest quality, large cap, dividend-paying stocks she can. Names like Texas Instruments Inc., Kellogg Co., ExxonMobil, Microsoft Corp. and Lowe’s Companies Inc.

“A lot of people are searching for income and they go out and they look for a stock not based on the quality of the stock, but based on what dividend they’re paying. The higher the dividend, the more risk in the stock,” she cautioned.

The average dividend in Ellenbecker’s portfolios is 2.3 percent. These type of stocks, while not paying the highest dividend, assure a dependable income. There’s also more certainty than riskier mutual funds, in which the buyers are changing the content day-to-day, she said.

“In a market where we are now where there isn’t a lot of easy to understand income options, people tend to run at what they see is the highest payout and they don’t consider the risk,” she said. “If the government is saying, basically, ‘There’s no value to money right now; it’s at zero,’ and someone’s paying 6 (percent), what does that say?”

If there’s any sign of trouble in these individual stocks, Ellenbecker sells them right away.

“I think that people still should have a balanced portfolio, because no one wants to see their portfolio go down,” she said. “Look to some high-quality mutual funds that have low internal expenses.”

Marshall
Marshall

When seeking yield, business development companies are one good option right now, said Jim Marshall, president and founder of Spectrum Investment Advisors in Mequon.

They pay a return of 7 or 8 percent, but are usually limited to investors that have a minimum of $500,000 in liquid assets because they’re not liquid daily, Marshall said. He recommends putting 10 to 15 percent of clients’ money into BDCs.

Outside of that asset class, Marshall chooses balanced mutual funds for value, rather than growth, investing. He is particularly liking dividend-paying energy and financial stocks at the moment for long-term returns.

“Once interest rates start climbing, that’s when you’re going to see financial stocks do better,” Marshall said.

For younger clients, he advises putting 70 to 80 percent of an investment portfolio in stocks, and for those nearing retirement, putting 50 to 60 percent in stocks.

“What we like to do, especially in this market, is to leave some of your powder dry, because you never know when the next correction is around the corner,” Marshall said. “By having some of your powder dry, you can take advantage of something like Brexit.”

By having cash on hand, clients can buy in during a market downturn and gain on it when the market recovers.

“A plodding economy is usually good for stocks,” Marshall said. “But the downside with stocks, because we have a Dow of 18,000, we’re not crazy about just jumping in and putting everything into stocks, because stocks are getting expensive.”

But if an investor is just starting out, it’s a good idea to pick a mutual fund rather than individual stocks.

“I would say the average investor is better off buying a fund than they are buying individual stocks,” Marshall said. “It’s so hard for the average investor to pick individual stocks.”

Cantrell said there’s a risk junk bonds may default or dividend rates may go down dramatically if there’s a strong market correction like in 2008.

“If money is needed in the short-term, then we almost have to ignore the low rates of return and just invest for stability and safety,” Cantrell said.

That’s when he advises CDs, savings accounts, money markets and very short-term, high-quality bonds.

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Molly Dill, former BizTimes Milwaukee managing editor.

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