Tags: jacob | wolinsky | investors | yield | risk

Investors Seeking High Yields Must Weigh the Risks

By    |   Thursday, 16 Sep 2010 12:56 PM

Investors have been in a quandary recently when considering where to invest their money.

Yields on U.S. government bonds have reached record lows.

Pacific Investment Management Co., the world’s largest manager of bond funds with more than $1.1 trillion of assets, thinks the Fed will attempt more quantitative easing and will push Treasury yields to lows not seen since the Eisenhower era.

Meanwhile, some money-market accounts are offering yields as low as several basis points and the price of stocks has been particularly volatile.

Investors have been wary of investing in stocks, worried about another major stock-market drop. In addition, many investors are in despair after missing out on a huge market rally that started in March 2009.

Bond yields and interest rates, on the other hand, remain low. Investors have been conservative recently, seeking safety and quality.

Investors want high-quality, investment-grade corporate bonds. IBM sold 1 percent, three-year notes in August, and Johnson and Johnson recently sold 10-year, 2.95 percent bonds. When interest rates rise, individual investors will be dissatisfied with such low returns.

In addition, when interest rates rise, the price of all those low interest-rate bonds will plunge. The price of bond mutual funds will fall and, although bondholders will continue to receive interest payments, should bondholders want to or have to sell, the bonds will sell at a discounted (below par) price.

Meanwhile, high-quality companies continue to sell their shares at compelling valuations, becoming increasingly attractive.

Some companies reduced or cut their dividend entirely during the worst of the recession, but the bad news has already occurred. Recent corporate earnings and profitability reports from several large-cap companies have been positive and these impressive numbers also help stock prices.

Examples of high-yielding, high-quality stocks include Kraft (3.82 percent yield), DuPont (3.90 percent yield), and Johnson and Johnson (3.68 percent yield).

Stock prices will rise and fall over a period of time, but the quarterly dividend will continue. And eventually, high-quality stock prices will rise.

With both corporate and government bonds, there is low yield and high risk. With high-quality stocks, the risk might be elevated, but so is the yield. 

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Investors have been in a quandary recently when considering where to invest their money. Yields on U.S. government bonds have reached record lows. Pacific Investment Management Co., the world s largest manager of bond funds with more than $1.1 trillion of assets, thinks...
jacob,wolinsky,investors,yield,risk
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2010-56-16
Thursday, 16 Sep 2010 12:56 PM
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