After becoming accustomed to strong stock market returns from mid-2009 through 2014, many investors are looking for ways to find robust returns again.
After a slightly down year in 2015, the broad market, as measured by the S&P 500 Index, is up more than 4 percent since Jan. 1, while a lucky few investors in some big-name tech stocks have grabbed all the eye-popping returns.
Meanwhile, historically low interest rates in the overall economy have suppressed bond yields, while anticipated inflation (also historically low in recent years) has threatened the wisdom of owning bonds because of the potential for decreased buying power once the bonds reach maturity.
So, if you’re concerned about the lackluster performance of your portfolio, what can you do to boost your returns without undue risk? That depends on your investment goals, risk tolerance and time horizon for retirement.
If you’ve got 20 years until retirement and aren’t hung up on buying highly appreciated stocks (as too many investors are) – you could carve out a value stock portfolio and wait for under-valued stocks with actual merit to come into favor. This doesn’t mean betting on small companies that have never done well. But no matter what you buy, the key to getting yield out of value stocks is a willingness to wait. The question, of course, is: for how long? That depends on how much of a hurry you’re in to get returns, balanced against what else you might be doing with your investment dollars. To buy value companies, you don’t have to pick individual stocks because there are abundant exchange traded funds (ETFs) with this focus.
Another route to returns is positioning for dividends, i.e. regular payments to shareholders that come from earnings. These are virtually certain for companies that have a long history of paying them -- and increasing them -- regularly. Except for companies in dire straits, changing a dividend policy is the last thing that many boards of directors will do because this can be hard on share price.
To get quality dividends -- those that truly reflect companies’ health and don’t come as a drag on earnings -- look for companies that have a history of paying these. Dividends provide a nice income stream while you’re still working or during retirement. Again, you can access this strategy through ETFs if you don’t want to buy individual stocks.
This market is a good one for employing a value/dividend strategy because there are many companies with depressed share prices that, because they are large (and were once more favored by the market), they pay consistent dividends. ETFs offering value stocks that pay dividends abound. One site to use in researching ETFs and individual companies’ dividend histories is dividend.com.
If these strategies don’t appeal in a slow-growth environment that could linger for years, you may want to explore other ways to deliver returns. Some of these alternatives come in the form of specialized funds that recently have been paying more than the bond market’s paltry 2 or 3 percent annual return. Often, such investments involve more risk than you may be accustomed to, so you should carefully weigh their downsides against their returns. These investments include:
Bank loan funds
These funds invest in loans made to mid-sized corporations and are a way to get some decent yield; some have recently been returning about 5 percent. Though the borrowers aren’t top-tier companies, these are senior loans, meaning that they would be the first to be paid off if the borrowing company has problems.
These mimic investment strategies employed by hedge funds. Like bank loan funds, these funds have the advantage of buying investments at institutional prices but have relatively low built-in fees for their investors.
Sovereign debt of emerging nations
Bonds issued by some emerging nations have recently been paying around 5 percent. Many of these nations have economies with good manufacturing growth because labor there is cheap and attractive to global enterprises. Nearly all countries have a habit of printing more money, when necessary to pay debts, and this lowers risk (at least for the short and mid-term). As many are rich with mineral deposits and oil, their economies and governments tend to do well when commodity prices rise.
These funds comb the market for stocks that don’t tend to rise and fall a lot. These can be a good defensive investment. If the market falls 20 percent, your shares might only decline half as much. You can’t boost your overall portfolio return if you’re taking hard volatility hits.
Real estate funds
This is a tricky area, especially right now. The U.S. market currently carries a fair amount of risk because of extremely slow growth in many areas, but selected international markets are another matter. These can be accessed through international real estate ETFs, many of which tend to have slower ups and downs, so you have time to exit if things get rough. (One advantage of ETFs over mutual funds is that you can sell them during the trading day. With mutual funds, you must take the share price at the end of the day.)
Regarding real estate in general, be wary of mortgage REITs (real estate investment trusts) touting dividends as high as 10 percent. Many do this by borrowing money and leveraging their portfolios. This may work out for these funds until interest rates increase, but then the debt is too great for them and they tend to collapse.
Depending on your risk tolerance, some of these investments may not be for you. But you can reduce your risk by keeping such investments to a small part of your holdings. This minimal exposure can have the benefit of adding diversification to your portfolio of stocks and bonds without significant risk.
When evaluating specialized investments, don’t be lured by nerdy, arcane notions that may prompt you to get too targeted or specialized. Adding a solar energy or palladium ETF to your portfolio would require attendant diversification moves that you probably don’t want to get into, even if you have the investment capital for this.
And above all, remember that just because something is popular doesn’t mean it’s going to be profitable. After all, high-priced stocks are popular or they wouldn’t be expensive, and their high prices make share price growth less likely for those coming late to the party. Good examples of this are telecom and utility companies, which are currently priced high relative to the earnings they deliver.
Any opinions expressed in this column are solely those of the author.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry.