Over the last few years, we have seen central banks loosen their policies greatly. As a result, interest rates have been cut to record low levels in the hopes of spurring economic growth. We have seen radical programs such as quantitative easing become the norm. Investopedia defines quantitative easing as:
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.
Here in the United States, the Federal Reserve has taken an aggressive stance and has implemented a policy to purchase $85 billion in asset purchases per month, while saying it is ready to alter the pace of the purchases depending on developments in the economy. Japan, on the other hand, decided to up the ante with an even more aggressive policy to purchase an unprecedented $1.4 trillion in less than two years in the hopes of spurring the inflation rate.
Investment in treasury bonds in no longer a viable option for most investors with interest rates at a extreme lows. The ten and thirty year treasury bond yields sit today at a measly 1.76% and 3.00%, respectively. Below, I will highlight a few options that offer investors a more attractive yield.
Preferred shares
Preferred shares are a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Investors can benefit greatly from preferred shares, as generally these shares pay attractive dividends while giving investors some exposure to the underlying company.
Many well-known companies offer investors the option of purchasing preferred shares such as Goldman Sachs, which just recently launched a new class J shares during April. These new shares will will trade under the symbol GS PrJ and offer investors a perpetual yield of 5.50% until May 10, 2023, then a yield of the three-month LIBOR + 364bps thereafter. Goldman also offers investors a range of other preferred shares with similar dividend yields and maturities. Going forward, buying preferred shares in a very secure company like Goldman Sachs will offer investors a safe yield over the long term. Investors won’t see the same price movement as common shareholders, but will reap the benefits of a return far above that of treasuries.
If you are looking for broad exposure to the preferred shares market, look no further than the SPDR Wells Fargo Preferred Stock ETF. This fund is composed of 131 different equities, so you get a very large basket of handpicked stocks. The fund currently pays out a 6.26% dividend yield, which is far above that of Treasuries. This is the perfect option if you are looking to minimize the volatility in your portfolio, as the fund has a very low beta of only 0.10. In addition to the high yield, investors will receive some broad exposure to the financial sector, as the fund is heavily weighted in favor of financials. This year, financials has been a hot area for investors. I believe that going forward, this sector will perform well due to the revival of the housing market and a low cost of capital.
