Maximizing Income: 5 Strategies for High-Yield Investing in 2024

With the S&P 500 hitting record highs, it’s easy to become fixated solely on the performance of these 500 US-listed stocks and overlook the myriad of investment opportunities that exist beyond them. While stocks have indeed been the top-performing asset class in 10 of the last 15 years, it’s crucial to note that in 15 of the past 25 years, alternative investments have outperformed stocks, even during years when stocks returned close to their historical average of almost 10%.

As we embark upon the second quarter of 2024, it’s imperative to acknowledge this broader investment landscape. It’s uncertain how much longer stocks will continue to outperform other investments, making it an opportune time to explore other relatively high-yielding opportunities. Moreover, due to the prevailing focus of many investors on stocks, some of these alternative investments may be available at reasonable prices, offering attractive interest rates or coupons.

Adam Kramer, manager of the Fidelity® Multi-Asset Income Fund (FMSDX), actively seeks opportunities across various assets, particularly in instances of temporary mispricing caused by investor overreactions to fear or uncertainty. In Kramer’s words, “In a good environment for stocks, there are still a lot of other opportunities out there.” Indeed, with the requisite skill and research capabilities, it’s possible to achieve total returns comparable to historical averages of stocks but with significantly less downside risk.

One reason opportunities are arising now is the uncertainty surrounding the economy, leading to genuine differences of opinion among investors on asset valuation. While the US economy is in the longest late phase of the business cycle since 1950, market sentiment appears more mid-cycle. This disparity presents opportunities to identify mispricings, thereby capitalizing on potential market inefficiencies.

1. Exploring US Treasury Bonds

US Treasury bonds with short- to medium-term maturities offer an attractive avenue for generating income with relatively low risk and potential capital appreciation as interest rates decline. Given the Federal Reserve’s actions to raise interest rates since 2022, rising yields have been accompanied by falling prices for existing Treasury bonds, offering opportunities for price appreciation.

2. Beyond Treasurys: Exploring Diverse Income Assets

While Treasurys present compelling opportunities, a diverse range of income assets can provide stock-like returns with less volatility, particularly if the economy enters a slowdown phase. Fixed-to-floating preferred stocks, despite their name, are hybrid securities that can offer high single-digit yields while potentially appreciating in value.

3. High-Yield Corporate Bonds with Short Maturities

Bonds issued by companies just below investment grade, particularly those with short maturities, offer an attractive alternative to stocks, especially during recessions. Historically, bond prices have risen while stock prices have fallen in such environments, making high-yield bonds a favorable income option.

4. Exploring Loans and MLPs

Floating-rate loans made by banks to companies and then sold to investors can offer attractive current yields with less sensitivity to short-term market fluctuations. Securities issued by master limited partnerships (MLPs) owning and operating oil and natural gas pipelines provide yields of 8% to 9%, presenting opportunities for income generation.

5. Professional Management and Research

For investors venturing into less-common income investments, professional management and thorough research are essential for risk management. Researching professionally managed mutual funds or separately managed accounts can provide insights into multi-asset income strategies.

In conclusion, while stocks have historically been dominant, exploring alternative investment avenues can provide high income opportunities with potentially lower volatility. With careful research and consideration, investors can navigate these opportunities to enhance their income portfolios amidst evolving market conditions.