BALANCING YIELD AND RISK
Every investor struggles to find the balance between yield and perils. They need to either assume more risks or receive less income. Negative interest rates, expensive bond and stock prices, sluggish global growth, and numerous events to and fro have made this act more complicated.
Having said that, what should an investor do to strike the right balance?
Dividend stocks can be the answer if you prefer to take risks from equities. However, remember these two things: stocks are highly volatile and not all dividend stocks are equally made. If you still want to invest in equities, consider dividend growers. It pertains to firms which have recorded consistent dividend growth. Impressive valuations, better balance sheets, and steady earnings are some traits that set apart dividend growers.
You may also invest in bonds or fixed income. Aside from income, it provides diversification to offset equity-related dangers. Short-term Treasuries gives the lowest yield yet default risk, while high-yield bonds hold higher yields yet higher risks.
If you desire to thread the line between yield and risk (for bonds, at least), go with municipal bonds.
A municipal bond, also known as muni, is a debt security seeking to fund capital expenditures within a county, municipality, or state. Although not as exciting as other securities, munis were one of the best performing bonds in 2015. A Bloomberg data showed municipal bonds generated 3.3% last year. And it is still one of the best sources of yield (in terms of risk-adjusted returns). Despite recent Federal Reserve’s moves, the municipal bond market have remained relatively steady.
If dividend stocks or bonds are not appealing enough for you, preferred stocks may benefit your portfolio. It is a class of ownership in a company which holds higher claim on assets and revenues, unlike common stock. Preferreds either give fixed or floating dividend payments. Even though some are skeptical about its stability, preferred stocks are still picked by many investors.
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