Reaching For Yield

For the past forty years, investors were accustomed to bond yields sufficient to generate enough income to cover the traditional 4% withdrawal rate. With the 30 yr bond trading below 3% and the 10 yr bond trading below 2.5%, this approach has become much harder to achieve in current markets. 

Bonds are still a portfolio diversifier, but with in the current low yield environment they offer lower returns and less portfolio protection than they have in the past. As a result, many investors are seeking higher yields elsewhere and in the process are incurring higher risks than what they may have bargained for. Here are the main trade-offs:

Action                                                           Effect
Overweight high-yield bonds                                                           Increases credit risk/increased volatility

Overweight longer term bonds (extend duration)                            Increases interest rate risk

Overweight dividend paying stocks                                                 Skews exposure to certain sectors

Shift from bonds to dividend paying stocks                                     Increases portfolio's overall volatility and risk


Investors need to keep in mind that concentrating assets in higher yielding investments can lead to increased risk and volatility. These strategies can be damaging to your portfolio's overall health.

An alternative to reaching for yield by moving out on the risk-return spectrum is to take a total return approach (viewing your portfolio from both a capital appreciation and a yield perspective), harvesting capital gains (which incidentally is often more tax efficient than receiving interest income) to make up withdrawal needs.