Sometimes Investors Need to Embrace a Little Risk

Financial commentators like to explain away the willingness of investors to accept record-low interest rates by saying that they are seeking a return of their capital rather than a return on their capital. They are more interested in preserving than in building — or, put another way, in being safe than sorry.

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Jin Lee/Bloomberg News

Some managers of equity income funds argue that stocks have perennial advantages over bonds.

That’s fair enough for people who are still earning and can expect their incomes to grow. But what are people supposed to do when their income is fixed — say, in retirement — and they need income to make ends meet?

A perusal of rates on money-market accounts, bank deposits and high-quality government bonds shows just how slim the pickings are. Ten-year U.S. Treasury bonds recently yielded about 1.6 percent a year and in early June hit 1.44 percent, the lowest rate in American history. Short-term rates in the United States and many other places pay nothing to the left of the decimal point and not much to the right, either. In fact, in Germany, the European haven, an issue of three-year government bunds in May had a negative yield, meaning that buyers paid the government to hold their money.

Such income, or the absence of it, is even less adequate when you consider that consumer and producer prices in much of the world are rising at well above the comparatively generous rates that many of the safest countries’ long-term bonds are paying. If inflation continues at recent levels, what you think of as your savings will buy less every year if you keep it in instruments like these.

That is why investment advisers recommend that you look elsewhere. Doing so may require you to move out of your comfort zone, they warn, but you stand to benefit substantially if you do.

Finding income today “is very difficult if you’re risk averse,” said Scott Colyer, chief investment officer of Advisors Asset Management, a Colorado Springs investment advisory firm. “If you’re not risk-averse, it’s probably one of the easiest times to find yield and income.”

He made the distinction between tolerating risk and taking it.

Investors may feel that government bonds are safer than other assets, like stocks with high dividend yields, his preferred option for earning income. But investment returns do not depend on what you feel. Shares of companies that are large dividend payers offer better income and better value, in his view, making them better risks.

“Dividend yields are higher than at most times in history, relative to bonds,” in many countries, Mr. Colyer said. “Bonds are expensive, high-yield stocks are not.”

Managers of equity income funds highlight perennial advantages that they believe stocks have over bonds. If all goes right, bondholders get their money back at maturity and fixed coupon payments along the way. Dividend payments to stockholders of the right companies tend to rise over time, they say, as do share prices. The trick is finding those companies.

Ian Mortimer, co-manager of the Guinness Atkinson Inflation Managed Dividend Fund and Guinness Global Equity Income Fund, concentrates on businesses whose high returns on capital allow them not only to increase their dividends, but to increase them at a faster pace than inflation while not missing payments during hard times, including the crippling bear market of 2008.

Such companies are the retort to risk-averse investors who point to the higher volatility of stocks versus bonds. The swings do not matter, Mr. Mortimer contended, if shareholders can keep pulling decent income out of them across a market cycle. “They might not beat inflation every year,” he said, “but they will do it over the long term.”

The businesses that meet his criteria are likely to be financially healthy and have some sustainable competitive advantage, like “great products, great management or a monopoly position,” he said. His favorites include Johnson & Johnson, a U.S. health conglomerate that has raised its dividend for 58 straight years, and Aberdeen Asset Management, a British fund management company that “has shown over time a very strong ability to create high cash flow,” he observed, “and has a great management focused on growth and a reasonably cheap valuation.”

Another selection is China Mobile, a telecommunications company that has increased its dividend by about 16 percent a year for five years.

Mr. Colyer, at Advisors Asset Management, recommends BGC Partners, an American electronic brokerage that is an offshoot of Cantor Fitzgerald and recently had a 10.5 percent yield. He also likes preferred securities — hybrid vehicles with characteristics of stocks and bonds — of financial-service firms in different industries and locations. His choices include American regional banks like Zions Bancorp and Regents Financial and the Dutch multinational insurance companies ING and Aegon.