How to Overcome the Federal Reserve’s Income-Destroying Policies

Sept. 17 came and went, and nothing changed. Yet another meeting of Federal Reserve officials, and the federal funds rate target range remains at 0% to 0.25%, where it has been anchored since December 2008.
The fed funds rates matters; it’s the rate that commercial banks lend to each other. That makes it the base rate that influences all other rates.
When the fed funds rate rises, short-term variable interest rates – credit card rates, money market rates, adjustable mortgage rates, commercial loan rates – rise. In time, 30-year fixed-rate mortgages and longer-term corporate bond rates follow.
These investments have long served as the wellspring for conservative income investors. Upon reaching the Buick-driving years, investors tilt their portfolios to quality fixed-income investments. In the good old days – pre-quantitative easing – the strategy worked. These investments generated a positive return after taxes and inflation. They maintained purchasing power.
The Fed’s iron-fisted financial repression has turned a burbling wellspring of quality income into a fetid puddle of income privation. Money market funds offer a few basis points of interest at best; a one-year CD might generate 1% annually. On the longer end of the yield curve, a 10-year U.S. Treasury note pays little more than 2% annually. Go out 30 years, and 3% is the reward.
Now, investors look to the end of October for a possible fed funds rate increase. The odds are discouraging. Traders are pricing a 14% chance for October. If nothing comes in October, then December is the last hope for 2015. I don’t hold out much hope, and I haven’t for all of 2015.
Many (including Goldman Sachs) point to mid-2016 for the first rate increase. The Fed’s proclivity for manufacturing excuses at will (unemployment below 6.5% was the initial target; long sinced passed) makes mid-2016 as good a target as any.
To capture meaningful income – income that generates a real return after inflation and taxes – investors must continue to reach out on the risk curve. Real estate investment trusts, master limited partnerships, dividend growth stocks, lower-grade bonds and preferred stocks remain the principal income sources.
For long-term investors, price volatility built into these investments is a lesser concern, as long as the income faithfully roll in. The concern is elevated when an investment needs to be sold in the near future. No one wants to sell into negative market sentiment.
The prospect of rising interest rates have weighed on the share and unit prices of many high-yield pass-through entities – business development companies (BDCs), REITs and MLPs. Rising rates, so it’s perceived, will raise borrowing costs, squeeze margins and reduce cash flows. In turn, dividends and distributions are threatened.
The logic is sound: pass-through entities must tap equity and debt markets in order to grow. Rising interest rates would raise the costs associated with tapping financial markets for additional capital.
But rates are a double-edged sword. Rising rates are also indicative of stronger economic growth. So while capital costs might rise, so will the price BDCs, REITs and MLPs can get for their output. Contrary to popular perception, these investments tend to hold their own in a rising-rate environment.
Commercial REITs have generated an average annual return of 11.4% over the six monetary tightening cycles that have occurred since 1979. When U.S. Treasury yields were rising, REITs generated an average annual return of 14.9%. MLPs rose in seven of the 10 periods, with an average annual gain of 4.7%. BDCs do well because they hold a large portfolio of variable-rate loans. When rates rise, these loans generate more income.
Of course, investors still haven’t got the message: Rates aren’t rising, and if they do, it’s a smaller deal than they realize. Therefore, I like the opportunities many high-yield investments offer. Many are priced for exceptional long-term return.
I see exceptional value in High Yield Wealth recommendations that yield over 10%, particularly the REIT and MLP recommendations. None have demonstrated an inclination to cut their dividends or distributions. Many are priced for success.
Click here to discover how High Yield Wealth is helping investors overcome the Fed’s disastrous interest rate policies with exceptional high-yield income opportunities.