Income Investors are Getting Hit from All Sides

The last few years have been tough on income investors. Many income-oriented portfolios use the 10-year treasury has the foundation and then build around that with other income producing investments. The yield on the 10-year treasury has been trending lower for the last 20 years, but it has really plunged in the last two years.

Now the 10-year yield has plunged below 1.5% and is currently at 1.29% as I write this. Think about that, the yield now is 1/10th of what it was 20 years ago. How do you build an income-oriented portfolio when one of the main tools to create income is 10% of what it used to be?

Now income investors have to look for other areas to generate income – municipal bonds, corporate bonds, dividend paying stocks. But these investment vehicles have also seen dramatic declines in their yields. Data from shows how the Moody’s Seasoned Aaa Corporate Bond yield has fallen over the last 20 years.

So investment grade yields are only down to 25% of what they used to be, where 10-year Treasury yields are 10% of what they used to be. That isn’t very helpful now is it?

Junk bond, or high yield, corporate bonds are currently yielding around 8.5%, but they come with considerably more risk than what investors get with investment grade bonds. Even junk bond yields are down from their 2000 levels.

This leaves dividend paying stocks, but the risk profile for stocks is considerably different than that of 10-treasury notes or even investment grade corporate bonds. We see the huge volatility swings in stocks in the first quarter and that is enough to spook any investor, but especially a retiree that is looking for income. From a historical perspective, dividend paying stocks have not been as volatile as non-dividend paying stocks, but if we look at a couple of ETFs that are focused on dividend stocks, they didn’t fare well during the market swoon.

I looked at three different dividend-focused ETFs and compared them to the S&P 500 SPDRs. I looked at the iShares Select Dividend fund (NASDAQ: DVY), the Vanguard High Dividend Yield fund (NYSE: VYM), and the SPDR S&P Dividend fund (NYSE: SDY). Looking at the performance of these four ETFs since the beginning of the year, the dividend ETFs have underperformed the overall market and they dropped lower in March than the S&P 500 did.

All three of the dividend-focused ETFs dropped over 34% at their lows and the DVY was down over 40%. The Spyders were down just over 30% at their low.

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