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Frankly, thanks to the U.S. Federal Reserve, it's surprising we have not seen a savers revolt in the United States.
We can debate how effective the Fed's Zero Interest Rate Policy (ZIRP) has been, but one thing is unquestionable: Those who rely on income from investments that are cautious and conservative have been brutally punished.
Traditional safe income havens like Federally Insured Certificates of Deposit and Treasury bills offer a minuscule return. It is not possible to retire and live off the interest earned on your savings unless you have several millions stashed away. Even then the return from conservative savings options will not provide a very luxurious retirement.
And according to Fed Chairman Ben Bernanke this condition will exist until at least 2015.
That's why in a ZIRP environment, savers must become investors.
To earn a decent return you have had to consider investments like stocks, bonds and real estate that require a deeper knowledge and risk tolerance than savings-oriented accounts. People with little or no investment experience or knowledge have turned to the stock market to earn the return necessary to fund their lifestyle and living expenses.
That idea might be frightening to life-long savers, but it doesn't have to be. Here's a strategy for finding high-yield investments in the Fed's ZIRP world.
Finding High Yield Investments
The first thing you have to do is sift through the bad advice from Wall Street.
Right now all of the advertising from Wall Street firms and the talking heads in the financial media is about buying solid, blue chip dividend-paying stocks to provide your income needs.
This is indeed wonderful advice, provided you were giving it back in 2009 when large blue chips were safe and cheap.
Yield-seeking investors have pushed up shares of traditional dividend stocks like the drug companies, electric utilities, and large oil companies. Dividend-paying blue chips are a great story and an easy thing to sell but are probably not the right strategy for most income seeking investors right now.
Look at a chart of stocks like Merck & Co. Inc. (NYSE: MRK), Consolidated Edison Inc. (NYSE: ED) or Chevron Corp. (NYSE: CVX). The time to buy was when everyone hated stocks three years ago, not after the shares have doubled in price.
Another thing to remember is words of wisdom from the Dean of Wall Street, Benjamin Graham. He told us that the most important concept in investing is to always maintain a margin of safety. You want to own securities where the chance of a permanent lasting loss of capital is as small as possible.
You can achieve this by trying to only buy those securities which trade at a discount to their asset, or book value. You want to buy shares when they're undervalued, which increases the potential appreciation.
If the stock is indeed a viable enterprise, it likely won't trade for less than the net worth of the underlying assets forever. Eventually the ship is righted and the patient investor rewarded.
You also want a company that's viable and able to stay in business for an extended period of time. You want to buy into healthy, long-term yield.
I do not want to create the impression that this is really easy to accomplish. It takes more patience and discipline than most investors are able to bring to bear. You have to go against the crowd and make the markets work for you and not against you. You could be buying stocks no one has heard of at a time when most investors are selling. When everyone is excited about stocks you will be quietly selling those of your holdings that have appreciated to full value.
Valuation rather than market fluctuations will be your guiding principle. If the value of an investment has not changed but the price declines you will learn to view this as an exciting inventory creation event and not a panic situation.
It is not easy – but it does work.
Combining value and dividend investing makes sense. If you are willing to invest the time and effort, you will find the income needed while ZIRP is firmly in place.
And here's one of the best opportunities to consider.
One of the Best High-Yield Investments
One of the better areas for finding high-yield, undervalued securities is business development companies, or BDC's.
BDC's function almost like private equity funds and make loans and equity investments to middle market companies. Although they may make investments in public companies most of the investments made by BDC's are in private companies. BDC's are pass-through vehicles much like Real Estate Investment Trust (REIT) and must pay out at least 90% of their earnings to investors.
One of the best positioned BDC investments right now is Apollo Investment Corp. (Nasdaq: AINV). Apollo is managed by a team of professionals with extensive experience in high yield and private equity investing. The firm is managed by an affiliate of Apollo Investment Management, a private equity hedge fund that has been around for decades. The lead portfolio managers have a combined 50 years' experience making the type of investments favored by BDC's.
Apollo has a widely diversified portfolio of investments, consisting of $2.6 billion spread across 64 different middle market and public companies. The average yield on their loans to these companies is more than 12% and most of that is after expenses are paid out to investors as a quarterly dividend. More importantly management is a conservative careful operator. As rates have fallen they have reduced their overall leverage and kept the dividend payout in line with actual earnings.
Insiders also like the fact that the shares trade for less than the asset value and think Apollo has a bright future. They have been buying shares in the open market and now own almost one-third of the available shares. This gives them a vested interest in seeing that the portfolio of investments performs at a high level and delivers a solid return. Right now the stocks trade at 95% of net asset value and yield more than 10%.
Apollo is just one example of how searching for income securities outside the norm can help build a powerful income stream that also has upside potential in the long term. Building a diversified portfolio of these situations can allow you to enjoy high-yield investments while others are trapped in low-income plays.
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