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Three possible choices for interest income now

Three possible choices for interest income now

| November 19, 2020

Executive Summary

We are in a low-interest rate environment. Like most specific economic and financial conditions, good for some, not good for others. Those who need to generate stable and low-risk income now are hurt by this environment. The linked author suggested 3 possible avenues for seeking higher income:

  1. Accept More Risk
  2. Lower Return Expectations
  3. Accept Lower Rates as Reality

"More risk means a potentially higher return, but it also means an increased possibility of lower returnsThis is the textbook definition of risk"

Source: Barry Ritholtz

Accept More Risk

The author suggests 3 choices to accept more risk:

  1. High grade corporate bonds
  2. Preferred Equity
  3. Increase equity allocation

Rather than repeat myself, please see the chart below for advantages and disadvantages of each

Lower Return Expectations

The author also suggests two ways to lower your return expectations

  1. Bond Ladder
  2. Municipal Bonds

Also see chart below for advantages and disadvantages

Embrace Reality of Low Rates

  1. TIPS
  2. Shorter duration

Three possible choices for interest income

(1) Accept More Risk




High-grade corporate bonds

Yield about 2.7% for AAA

Greater risk of default than US Treasuries

Preferred equity

5% yield at par

Inferior capital preservation to bonds. e.g March of 2020 like other stocks they fell 30%-35%

Increase equity allocation percentage in your portfolio. E.g. change 60-40 to 65-35 or even 70-30

When equity market goes up your portfolio will do better.

When equity market goes down your portfolio will do worse


(2) Lower Return Expectations




Bond Ladder

Possibility of each ladder rung getting higher interest rate

Rising interest rates in future are not certain.
Principal price fluctuation – up or down – prior to maturity

Municipal bonds

Possible tax advantage depending on your state of residence

Higher yield than Treasuries

Stick to highest quality to for lowest default risk.


(3) Embrace Lower Rates as Reality

TIPS – Treasury Inflation Protected Securities

Principal amount increases with inflation

Inflation has been very low recently

Shorter Duration

Potential 0.75% greater yield

Lock up capital if held to maturity

The information provided is not intended to be tax or legal advice, and my not be relied on for the purpose of avoiding any federal tax penalties. In general, the bond market is volatile and municipal bonds carry interest rate, inflation, credit and default risks. Income from municipal bonds may be subject to federal and/or state alternative minimum taxes. The content is derived from sources believed to be accurate. There is no guarantees any investment or strategy will meet its intended objective. To determine which investment may be appropriate for you, consult with your financial, tax or legal professional.

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