Hunting for Yield

There has been a lot of dialogue about how conservative investors can boost their yields with minimal risk. There really are no easy answers. Yet investors and their advisors continue to look for them.

I would suggest that this issue should be placed in a broader perspective. Inflation is largely non-existent right now, as measured by the government’s CPI numbers. In fact, in January prices actually decreased.

The issue for those requiring income is their ability to stay ahead of inflation and maintain their purchasing power. If inflation is running at 4% and I earn 6% in my income-oriented portfolio, my inflation adjusted return is 1.92%. If inflation is 0.5% and I earn 2.5% in my portfolio, my inflation adjusted return is 1.99%.

We did not hear much about the need for yield when inflation was running at 3-4%, because investors were able to earn enough yield in CDs, money markets, treasuries, high grade corporate bonds, and dividend-paying stocks to maintain a healthy margin over inflation.

I am, of course, ignoring taxes. But the point is that investors need to focus on their inflation-adjusted returns. The situation is not as dire as many believe.