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And just like that, interest rates are back near historic lows.

Last year Treasury bonds offered yields above two percentage points. Now they are pinned close to zero and I’m having more conversations with institutions, financial advisors and other investors who are looking for new ways to boost income in portfolios.

The good news is that the recent market volatility created potential opportunities for income in pockets of stocks and bonds. As always, knowing what you own will be key to navigating the next stage of the market’s recovery.

Consistent income can be useful for retirees who need to convert their savings into monthly payments, or savers looking for portfolio growth. Generally speaking, investors often look for income in bonds that produce income through coupon payments, common stocks that produce income with dividends, and preferred stocks that can help provide total portfolio return.

Here are three ideas—one for each asset class that I mentioned—for accessing income-generating strategies using low-cost exchange traded funds (ETFs).

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Corporate bonds started to sell off in February 2020 as investors tried to gauge the economic impact of the global pandemic.

One way to measure ups and downs in the corporate bond market is by looking at “credit spreads,” or the difference between a U.S. Treasury bond and a corporate debt security with the same maturity. Spreads are a market-based measure of how much an investor is being compensated for owning riskier bonds. Typically, the greater the bond credit risk, the higher the yield. This is because investors price in the potential that an issuer might not be able to repay its debt obligations.

Investment grade credit spreads soared earlier this year until stabilizing once central banks provided an unprecedented amount of support in late March. Even so, spreads are wider now than they were a year ago — meaning that investors can pursue more income from corporate bonds at a relative discount—a potentially compelling opportunity in this environment.

Figure 1: Investment Grade Bond Index Yields

Chart: The Markit iBoxx USD Liquid Investment Grade 0-5 Index and Markit iBoxx USD Liquid Investment Grade Index are used to represent the yields shown in the chart above.
Indexed to iBoxx

Source: BlackRock and Markit iBoxx as of 4/30/2020. 0-5 Year Investment Grade represented by the Markit iBoxx USD Liquid Investment Grade 0-5 Index and US Investment Grade represented by the Markit iBoxx USD Liquid Investment Grade Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.

Karen Schenone, CFA
Head of U.S. iShares Fixed Income Strategy
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These days, to boost income above 5% investors will need to accept more credit risk. High yield bonds come with credit ratings that are below investment grade, meaning that issuers are at higher risk for default or bankruptcy, often because a company has a capital-intensive or cyclical business model. Investors are compensated for this credit risk with higher yields.

Just like investment grade bonds, high yield bonds were jolted early in the year but reacted favorably when the central banks provided support to the credit markets. Through the rest of 2020, high yield bond returns could exhibit volatility and ongoing economic uncertainty may weigh on these issuers.

Yields on high yield bonds are still at higher levels than past market downturns, but are still below the highs experienced during the global financial crisis in 2008. For those willing to tolerate some price volatility and increased credit risk, high yield bonds may offer more income potential than investment grade bonds.

Figure 2: High Yield Bond Index Yields

Chart: The Markit iBoxx USD Liquid High Yield 0-5 Index and Markit iBoxx USD Liquid High Yield Index are used to represent the yields shown in the chart above.

Source: BlackRock and Markit iBoxx as of 4/30/2020. 0-5 Year US High Yield represented by the Markit iBoxx USD Liquid High Yield 0-5 Index and US High Yield represented by the Markit iBoxx USD Liquid High Yield Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.

Indexed to iBoxx

A more targeted way to invest in high yield is to seek out “fallen angels,” or high yield bonds that were downgraded to high yield from investment grade. Indexes that track these bonds have tended to exhibit a better credit quality profile as compared to traditional high yield bond indexes. Over time, fallen angels have been more likely to get upgraded back to investment grade status rather than continue to deteriorate as the issuers improve their balance sheets or restructure. Fallen angels are an alternative way to potentially boost income in portfolios relative to traditional high yield and investment grade bonds.

Karen Schenone, CFA
Head of U.S. iShares Fixed Income Strategy
Read more

Preferred stocks and high dividends

Aside from bonds, stocks can provide a source of income through dividend payments. While in this challenging economic environment some companies might reduce or even cut dividends, dividend paying stocks have historically offered strong risk-adjusted returns.1

Two popular ways to invest in dividend-paying stocks are high dividend payers and dividend growers. High dividend payers tend to be concentrated in industries that are more mature and can afford to pay out their earnings. Dividend-growing stocks tend to be from more growth-oriented sectors, such as information technology and consumer discretionary.

Another option is preferred and hybrid securities have features that combine elements of both stock and bonds. They are typically higher in the capital structure than common stock and have some potential for capital appreciation. Like bonds, these securities pay fixed or floating-rate income distributions in the form of dividends or even coupons depending on how the security is structured. Since they are lower than bonds in the repayment of claims, they tend to pay higher yields than the company’s bonds. These three dividend strategies can be used separately or paired together to provide a diversified equity income solution.

Figure 3: Preferred and Dividend Index Sector Allocations

Chart: The ICE Exchange-Listed Preferred & Hybrid Securities Index, Morningstar US Dividend Growth Index and Morningstar Dividend Yield Focused Index USD are used to represent the sector allocations shown in the chart above.

Sources: BlackRock as of 4/30/2020. Allocations subject to change. Preferred Stocks represented by the ICE Exchange-Listed Preferred & Hybrid Securities Index, US Dividend Growth represented by the Morningstar US Dividend Growth Index and US Dividend Yield represented by the Morningstar Dividend Yield Focused Index USD.

Karen Schenone, CFA
Head of U.S. iShares Fixed Income Strategy
Read more