Plenty of investors put investment income at the top of the list of their investment goals. But let’s face it, these days, income can be hard to find.
If you are an investor looking for income from the stock market, you are likely to be disappointed—after a long period of rising stock prices, the S&P 500 Index currently has a dividend yield of less than 2 percent.1 And if you are hoping to generate income from bonds, relatively low interest rates have held down fixed-interest yields.
However, there is an asset class that may help fill the income gap: alternative investments. Alternatives are a broad category that includes direct real estate, energy, corporate credit, private equity, and commodities.
Many types of alternative assets seek to deliver income. For example, real estate investments deliver income from rents. That income may even offer a hedge against inflation, because a lot of real estate assets have short-duration leases that can be renegotiated when interest rates and inflation rise. Corporate credit investments deliver income from interest payments, and if the underlying loans pay floating-rate interest, this income may also offer some protection against inflation. Finally, private equity funds may deliver income from dividends paid by the companies they invest in.
This means that an allocation to alternatives may help boost a portfolio’s income-generating potential. The chart below shows the relative income yields of a traditional 60/40 portfolio alongside one that includes alternative assets.
* Past performance is no guarantee of future results.
Source: Bloomberg. This chart is intended for illustrative purposes only and does not represent actual investments. You cannot invest directly in an index. The hypothetical portfolio with Alternatives comprises a 40 percent allocation to equity, a 40 percent allocation to bonds, and a 20 percent allocation to alternatives. The analysis assumes that the hypothetical portfolio with Alternatives is rebalanced amongst the three sections of direct real estate, global infrastructure, and energy on a quarterly basis. The hypothetical alternatives allocation is a blend of equal segments of direct real estate, global infrastructure, and energy. The underlying data for direct real estate used in this analysis was based on the NCREIF Property Index that produced an income return of 6.12%, a total return of 9.17% and a volatility of 5.38%. The underlying data for global infrastructure used in this analysis was based on the Dow Jones Brookfield Global Infrastructure Index that produced an income return of 1.05%, a total return of 9.82% and a volatility of 14.65%. The underlying data for energy used in this analysis was based on the S&P 500 Energy Sector GICS Level 1 Index that produced an income return of 2.43%, a total return of 10.66% and a volatility of 21.01%. The underlying data for equity markets used in this analysis was based on the S&P 500 Index that produced an income return of 2.22%, a total return of 9.12% and a volatility of 14.90%. The data for the bond markets used was based on the EFFAS Bond Index for U.S. 10-year government bonds, which produced an income return of 4.81%, a total return of 6.07%, and a volatility of 12.74%. Data as of: 12/2002–12/2016.
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security.
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