Rohan ReddyThe Global X Income Monitor for this quarter can be viewed here. This report seeks to provide broad, macro-level insights into the income characteristics of various asset classes and strategies.
With Treasury yields ticking upwards and the 10-year holding firmly above 3%, income investors now appear to have more options to pursue their income goals than they did in the past when risk-free yields were at historic lows. Using the dividends from large cap equities as an alternative to fixed-income coupons may fall out of favor given that both Treasury yields and equity volatility have risen.
We believe that it is increasingly important to be discerning when evaluating dividend strategies based on a portfolio’s goals. Many high dividend paying strategies now count the Energy sector as their largest allocation given the downturn in that sector this year. For investors with a value tilt, these historically high dividend payers could also be useful alternative given their lower valuation multiples. For investors with a preference for stocks with more robust fundamentals, quality dividend strategies could be an area that may weather a renewed uptick in market volatility.
Within fixed income, high yield bonds have seen yield spreads continue to remain tight, offering little reward compared to historical levels for the risks associated with these investments. An alternative to consider is the preferred space, which has had attractive yields and often pay dividends that are taxed as qualified dividend income rather than as ordinary income.
In an environment heading into 2019 where increased volatility may be the norm, we believe there may be opportunities for both strategic and tactical allocation shifts for investors to help achieve yield targets, diversify sources of income, and navigate a rising interest rate environment.