Generating Investment Income: Four Strategies When Interest Rates Are Low

A woman seated at a desk looks at a smartphone.

Many of us don’t think about income investing until we’re at or near retirement. But thinking about it can be useful regardless of how near or far we may be from retirement. That’s because generating income can improve long-term investment outcomes by helping you preserve your wealth, helping you protect your money from inflation, and helping prevent you from making emotional decisions during down markets.

In today’s low-interest-rate environment, generating income could be a challenge—though it’s still possible. “You may need to think outside the box,” says David Furst, Vice President and Advice Strategy Specialist with Wells Fargo Advisors, “and diversify your income streams beyond traditional fixed-income assets, such as bonds. For many investors, we think it’s a really good idea.”

Here, Furst shares four strategies for generating income and keeping your portfolio aimed at solid long-term growth.

Rebalance and diversify your portfolio

With the recent market fluctuations, some portfolios may have been pushed out of alignment based on their risk profile. Furst says now could be a great time to rebalance your portfolio in order to get back to your long-term, strategic asset allocations. Rebalancing means staying diversified, which for many portfolios includes an income component.

“If you need to build the income side of your portfolio, consider selling off other assets in your portfolio that have become over-weighted. Just be sure to mind potential tax consequences of your rebalancing,” Furst says.

Focus on quality, especially within fixed income

In a volatile market, quality stocks may decline in value, but potentially not as much as other parts of the market. The same is true for income-producing assets such as bonds.

Furst says most investors should consider sticking with investment-grade securities, focusing on high-quality corporate debt, municipal securities, or residential mortgage-backed securities, and preferred stocks. A volatile market environment may tempt you to search for yield in lower-rated bonds, but you may want to avoid that temptation. “We don’t recommend that approach, because of the higher level of risk,” Furst says. “You’re not likely to get more yield without giving something up, so be sure you understand the risk.” 

Look to dividend-paying stocks

The S&P 500 index has historically provided strong dividends. Although some companies may reduce or cancel their dividends in 2020, it still may be worth considering investments in quality companies that have provided consistent dividends. “You can potentially generate income, with the opportunity to impact your total return over time,” Furst says.

Give investing in real estate a closer look

Investing in private real estate provides the opportunity to diversify into an asset class that could bring potential tax advantages as well as reliable income in the form of monthly lease payments from tenants. “Done right, with a watchful eye on market pricing and trends, real estate can be a powerful tool,” Furst says.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful. All investing involves risk, including the possible loss of principal.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income that other investments.

There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.