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.
High-yield exchange traded funds
I always look first to Vanguard when I look for exchange traded funds. One of my favorites is the Vanguard High Dividend Yield ETF (NYSEMKT:VYM). This fund has an exceptionally low expense ratio of only 0.10, while offering a great yield of 3.12%. When you take a look at its top ten holdings, you will see a great mix of high-quality companies, such as Wells Fargo, ExxonMobil, Johnson & Johnson, and General Electric. These companies all offer investors broad exposure to the market while being known for their long history of increasing dividends. I believe we will see increased inflows into these stocks as retail investors begin to come back to the market. As the value of this fund rises, I remain confident the pace of increasing dividends will keep this yield supported at 3%.
Invest in Vices
Sinful companies have long been popular for yield-driven investors, as these companies tend to have high dividend payouts. I am a big fan of companies in the gambling, alcohol, and tobacco sectors as the business models tend to be very consistent and strong through all types of economic conditions. I would like to highlight Altria Group Inc (NYSE:MO), one of my favorite sinful stocks and one of the top-rated stocks here in The Motley Fool community. Altria Group Inc (NYSE:MO) is a top player in the American tobacco industry with brands like Marlboro, Skoal, and Parliament, to name a few. The company has diversified itself across the entire industry and is now becoming a dominant player in the growing smokeless tobacco industry. The company currently pays investors a dividend yield close to 5%. Going forward, I fully expected Altria Group Inc (NYSE:MO) to maintain its long history of returning money to shareholders.
Conclusion
Consider other options before locking up your money in the low-paying Treasuries market. Preferred shares offer investors great yields while providing some exposure to the underlying company. High-yield dividend funds such as the Vanguard High Dividend Yield ETF provide investors a cost-efficient vehicle to hold high-quality companies.
The article Searching for Yield in a Low Rate Environment originally appeared on Fool.com and is written by Nathaniel Matherson.
Nathaniel Matherson has a position in Altria Group and Vanguard High Dividend Yield ETF. The Motley Fool has no position in any of the stocks mentioned. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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