Everyone has heard the proverb “a bird in the hand is worth two in bush”. This most assuredly applies to income investing today. Too many investors are focused on the “second” bird in the bush, or the potential for equity appreciation.
Since 1957 the S&P 500 has averaged approximately 8% return of which more than half (4.4%) came from dividends. The current dividend yield is only 2%. An investor might consider whether taking equity risk at this point in the cycle (with the S&P 500 up more than 400% over the last 10 years) for a 2% dividend yield is really the best idea. FOMO (Fear of Missing Out) can be a powerful and often ill-advised emotion.
A superior solution may be taking an overlay approach, such as combining an aggregate bond ETF like “AGG” that has a current yield of 2.71% with an “overlay” that adds a second source of income to the bonds. Over time a 3% incremental return is possible using a properly constructed overlay. When the two strategies are combined for a 5-6% income stream investors should be far more willing to de-risk their equity portfolio. The risk profile for this type of “AGG plus Overlay” approach should be 1/3 to 1/2 of equities, which should make investors sleep more easily.
We implement this strategy through the products and services we offer. If you’d like to learn more, please subscribe to our mailing list or visit liquidstrategiesllc.com.