Income Monitor: Q1 2020

The Global X Income Monitor for Q1 2020 can be viewed here. This report seeks to provide broad, macro-level insights into the income characteristics of various asset classes and strategies.

Q1 was a turbulent period marked by a black swan event. COVID-19 wreaked havoc on the financial markets and the real economy. Income investments were on the front end of much of this speculation, with dividend yields expanding to abnormally high levels and credit spreads hitting record levels.

With the Fed dropping rates to zero and providing enormous liquidity to the market across a variety of bond sectors, income investments largely avoided disaster. Yet risks still remain. With companies in cash preservation mode and the government mandating emergency loans coincide with a moratorium on buybacks and dividends, equity investors could see less income in the coming quarters. Bond markets carry risks too, as downgrades occur at a rapid rate, with over 80% of downgrades by S&P to companies in junk territory.1

Further stressing income investors may be the lack of yield in higher quality investments. With the 10 year treasury bond well below 1%, investors cannot rely on government debt for meaningful income. This will force investors to continue to look at riskier areas of the market to achieve their income needs.

One option to consider is covered call strategies, which generate income from selling call options on equity positions. Such an approach limits the upside of one’s position in exchange for current income from the option premiums. Historically, periods of higher volatility result in higher option premiums.

The preferred stock segment is not immune to the broader challenges in the income space, but could be well-positioned over the long run. Most preferred issuers are well-capitalized financial institutions like banks and insurance companies. While their common stock dividends could be at risk from regulators, current legislation does not include preferreds in the dividend suspension mandate. In addition, preferred issuances are often ‘cumulative’, meaning preferred stockholders are paid before common stockholders in the event of a coupon and dividend suspension.