Keep Earning Income Even When Rates Are Low

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Labor Day is coming up. It is a day that honors hard-working men and women across the United States.

As an investor, you’d like to think that all your investments are working hard, too — including the ones that are producing income.

But can your income-oriented investments be productive when short-term interest rates are at historic lows? Or can you find other investment possibilities that could potentially boost your cash flow?

The answer to both these questions is yes, but you may have to take a closer look at where you stand on the risk-reward spectrum.

For example, you might need to consider longer-term income producers, which typically pay higher yields than shorter-term equivalents.

Longer-term fixed-rate securities, such as bonds, must pay these higher rates to reward investors, who face both interest-rate risk — the possibility that interest rates will rise, causing the value of existing bonds to fall — and inflation risk, the threat of losing purchasing power by the time long-term bonds have matured. Still, you may be willing to accept these risks in exchange for the higher yields.

However, you may be looking for income producers that can work hard for you without having to hold them to maturity. This is because the yield curve — the line that plots the relationship between yield and maturity — is fairly steep right now, which, in English, means you can gain noticeably higher yields just by modestly increasing the maturity of your investments.

You can also help protect yourself from these risks by building a “ladder” consisting of short-, intermediate- and longer-term bonds and certificates of deposit (CDs).

Once you’ve built your ladder, it can help you weather changing interest-rate environments.

When market rates are low, you’ll still have your longer-term bonds and CDs earning higher interest rates. And when market rates rise, you’ll be able to reinvest your maturing short-term investments at the higher levels.

If you need the cash, you can liquidate the maturing bonds and CDs. 

You may also be able to boost your income by owning dividend-paying stocks. If you’re not in need of the cash, you can reinvest the dividends and boost your ownership stake, which is a key to increasing your wealth. But if you do need the money, you can take the dividends as cash.

Keep in mind that income producers are not a “sure thing” because companies can decide to reduce, or even discontinue, their dividends at any time.

In addition, history tells us that you may experience more price volatility from stocks, and they can be worth more or less than the original investment when sold.

You can find ways to keep income-producing investments working hard for you, despite the prevailing low interest rates.

This article was written by Edward Jones for use by your local Edward Jones financial adviser. Mike Blaes is a licensed financial adviser with the firm of Edward Jones. For more information, call him at (928) 476-6427.

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