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Why Investors Should Rethink Traditional Income Strategies

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Why Investors Should Rethink Traditional Income Strategies

income strategies

Why Investors Should Rethink Traditional Income Strategies

Humans are creatures of habit. We all have daily routines, whether it’s walking the same lunchtime route, watching a familiar TV show, or cooking the same meal over and over again. Once we develop a pattern, it can take a drastic change to convince us to rethink our approach.

One such shake-up to ingrained investment habits is the changing landscape of income investing.

In today’s infographic from New York Life Investments, we explain why traditional long-term bonds may not be as effective as they were in the past, and which additional income strategies investors can consider.

The Status Quo

For years, investors have relied on traditional longer-term bonds as the centerpiece in an income portfolio. These debt instruments usually pay out interest to investors on a predetermined schedule, providing a steady income stream investment. Historically, they have also been subject to less volatility than equities.

The typical bond portfolio is diversified, much like the Bloomberg Barclay’s U.S. Aggregate Index. Here’s how the sectors are broken down in the index:

SectorMarket Value
Treasury39.5%
Government-Related5.8%
Corporate25.0%
Securitized29.7%

Unfortunately, this income strategy has been less effective in recent years. Over the last decade, core bond duration has increased by 1.5 years while yields have decreased by almost 2%. Essentially, interest rate volatility has increased—but investors are less compensated for the risk.

In light of low rates and higher expected market volatility, it’s critical that investors explore other income solutions. Luckily, there are many lesser-known asset classes for investors to consider.

Additional Income Strategies: An Investor’s Choice

When investors decide how to re-allocate, they can keep these objectives in mind:

  1. Preservation of principal (risk level)
  2. Pursuit of capital (growth potential)
  3. Perseverance in markets (long-term objectives)

Which additional income strategies can they explore?

Taxable Municipal Bonds

Issued by state and local governments, the yield of taxable munis has historically been higher than that of other sectors. Taxable munis also have a strong credit rating—over 76% of U.S. municipal bonds outstanding are A+ rated or better.

Insured Municipal Bonds

Investors can get additional downside protection with insured municipal bonds, which are guaranteed to pay interest and principal back by private insurers. They have historically performed similar to munis while capturing less of the “downside”, often providing an attractive risk-adjusted return for income investors.

Short-duration, High-yield Bonds

Bonds with a shorter duration and higher yield can be a lower volatility approach to achieving the same income investing goals.

Yield and Risk in Bonds (July 1, 2014 – June 30, 2019):

Bond TypeYieldStandard Deviation (annualized)Yield per Unit of Risk
U.S. Aggregate Bonds2.492.940.85
High Yield Bonds6.055.601.08
Low-duration, High-yield bonds5.003.901.28

Short duration funds have lower interest rate risk, and can offer attractive yield per unit of risk.

Yield-Centric Equities

Equities can also play a role in an income focused portfolio. Investors should look for established companies that are achieving:

  • Growth in free cash flow
  • Stable or growing dividends
  • Share buybacks or debt reduction

Over the last 40+ years, the annual compound return of stocks with growing dividends have outperformed dividend cutters on the S&P 500 by more than 4%.

Preparing for Your Future

Maximizing the benefit from new income opportunities can take time. For this reason, it’s important to consider potential portfolio changes now, so that these strategies can play out in the lead up to retirement years.

It may be tempting to stick with the status quo—both in daily routines and investment strategies—but those who proactively adjust their approach will be able to maximize their potential.

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Infographics

Visualized: Three Investment Opportunities for the Future

Here are three investment opportunities to consider as the U.S. government proposes a record $6 trillion in budget initiatives.

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Investment Opportunities

This infographic is available as a poster.

Visualized: Three Investment Opportunities for the Future

With proposed government spending initiatives set to reach $6 trillion, the U.S. could be entering a new era of economic potential.

Sweeping measures have been proposed to support the economy—reaching levels of sustained spending not seen since WWII. These include a $2.3 trillion American Jobs Plan and a $1.9 trillion American Rescue Plan.

But how will this affect financial markets, and what investment opportunities does this present? As we look ahead, this infographic from New York Life Investments explores three potential areas of growth.

Three Investment Opportunities

Here are key trends that could shape the future—creating new opportunities for investors—as government spending increases:

1. The Strategic Role of Debt

In 2021, corporate debt sits at roughly 50% of U.S. GDP.

Importantly, COVID-19 relief packages helped offset a wave of defaults. Yet at the same time, a record $1.7 trillion in corporate debt was issued by nonfinancial companies in 2020—$600 billion higher than the previous peak. This rise in debt may offer potential investment opportunities.

In a low-interest rate environment, debt is relatively less expensive for companies to hold than during periods of high interest rates. This means they can invest in their business, make acquisitions, and gain greater market share.

Companies with investment-grade debt, which have stronger ratings from credit agencies, will likely be better positioned to make strategic business moves and mitigate the potential of future default.

2. Digital Infrastructure

There are several core components that underpin technology today:

Semiconductor chips: Key components in electronics such as smartphones, computers, refrigerators, and cars. As electronics proliferate, semiconductor companies may provide windows of opportunity. By 2030, electronics are projected to make up 45% of a car’s cost, up from 18% in 2000.

Broadband: Infrastructure required for internet access, including in rural and remote areas. Across OECD countries, broadband subscriptions per 100 people is just 33.3, illustrating a gap in access to high-speed internet. 5G, fiber optic cable, and internet infrastructure companies could offer the essentials that are needed.

Hyperscale cloud providers: Enable vast amounts of data and computing power to operate on cloud-based platforms, often in real time. With average gross margins of 57% and net debt to equity of 4%, cloud computing vendors could be poised for growth as data expands exponentially.

3. Emerging Markets’ Growing Middle Class

In the last two decades, emerging market (EM) income per capita has doubled. As disposable incomes rise, the consumer landscape is shifting towards more sustainable products.

Willingness to Pay a Premium for the Following Attributes% of Respondents
Contains organic/all-natural ingredients41%
Contains environmentally friendly/sustainable materials38%
Offers/does something no other product on the market provides37%
Delivers on social responsibility claims30%

Source: Conference Board Global Consumer Confidence Survey conducted with Nielsen. Data as at June, 2020.

Notably, the plant-based meat market in Asia is projected to grow 15.9% annually by 2026. In fact, global consumer searches for sustainable products have grown 71% since 2016.

Forces of Change

At this critical juncture in spending lies new investment opportunities. While it’s impossible to predict the future, strong underlying trends provide clues for how investors can think about positioning their portfolio.

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The 5 Fastest Growing Industries of the Next Decade

We reveal the five fastest growing industries of the future, within broader sectors such as healthcare and technology. Which industry will be number one?

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Fastest Growing Industries

This infographic is available as a poster.

The Fastest Growing Industries of the Future

Today, the U.S. economy looks very different than it did hundreds of ago. While railroad stocks dominated in the 19th century, industries within technology and healthcare have grown substantially in recent years. As dynamics continue to shift, what will be the fastest growing industries of the future?

In this infographic from New York Life Investments, we uncover the industries projected to see the fastest growth rates over the next decade.

What Are the Fastest Growing Industries?

The U.S. economy is growing. From 2019 to 2029, total industry output is expected to rise by more than 20%.

Output is the value of final goods and services, as well as intermediary sales that are not typically included in GDP. In this case, output is based on chained 2012 dollars, which is a method of adjusting real dollar amounts for inflation over time using 2012 as a base year.

Below, we count down the fastest growing industries from 2019 to 2029, according to projections from the U.S. Bureau of Labor Statistics.

#5: Outpatient Care Centers

This industry is defined as facilities where the patient is not required to stay overnight, such as:

  • Mental health and substance abuse centers
  • Family planning clinics
  • Dialysis clinics
  • Multidisciplinary clinics

As patients demand more convenient and less expensive care, the popularity of outpatient care centers has grown. Advances in medical technology, such as minimally invasive surgeries, also allow for same day release. Here is what projected growth looks like for the industry.

Compound Annual Growth Rate3.2%
2019 Output$122B
2029 Output$168B

However, investors may want to consider that health care leaders say implementing information technology (IT) is their greatest challenge.

#4: Computer System Design & Related Services

Companies that primarily provide IT expertise fall within this industry. Here are some examples:

  • IT consultants
  • Programming services
  • Video design
  • Web page development
    • The growth of e-commerce and digital marketing will likely contribute to the industry’s success. For instance, U.S. e-commerce climbed by 32% in 2020. Buoyed by these trends, computer systems design companies are expected to have a compound annual growth rate exceeding 3%.

      Compound Annual Growth Rate3.2%
      2019 Output$518B
      2029 Output$712B

      On the other hand, investors may want to watch for the high capital costs some IT companies could incur to upgrade outdated platforms.

      #3: Oil & Gas Extraction

      This industry includes companies involved in the preparation of oil & gas, up to the point of shipment from the producing property. Some examples are:

      • Integrated oil & gas companies
      • Drilling contractors
      • Exploration & production companies

      As inflation rises, extraction companies may benefit from higher prices and wider profit margins. The industry is expected to have the third highest growth rate over the next decade.

      Compound Annual Growth Rate3.4%
      2019 Output$474B
      2029 Output$660B

      However, investors may want to consider the growing traction of sustainable investments. While oil demand isn’t projected to peak until 2035, the shift to clean energy may cause long-term challenges for the industry.

      #2: Information Services

      Businesses that supply, search for, or publish information fall within this industry. Some examples are:

      • News syndicates
      • Internet publishing
      • Broadcasting
      • Web search portals

      Consumption of trusted news brands is growing, and paid subscriptions are increasing in richer Western countries. In addition, Google has committed at least $1 billion to license content from publishers for its News Showcase product. Here’s what potential growth looks like for information services companies.

      Compound Annual Growth Rate4.2%
      2019 Output$243B
      2029 Output$365B

      On the other hand, ad revenue is falling in some segments. Investors researching this industry may want to consider platforms that are diversifying their revenue streams.

      #1: Software Publishers

      Topping the list of the fastest growing industries is companies that design, install, and provide post-purchase support for software. Some examples are:

      • Cybersecurity
      • Graphic design
      • Operating systems
      • Customer relationship management

      Amid remote work and e-commerce growth, software enables companies to connect with employees and customers. The industry is projected to have a compound annual growth rate of almost 5% from 2019 to 2029.

      Compound Annual Growth Rate4.8%
      2019 Output$236B
      2029 Output$378B

      At the same time, the industry has relatively low barriers to entry. Investors may want to watch for competitors, which can pop up anytime and threaten existing companies’ market share.

      Industries of the Future

      Investors with a long-term view can consider investments in these high potential areas. Propelled by market trends, the fastest growing industries fall within three broader sectors:

      By looking to the future, investors may be able to capitalize on industries poised for growth.

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