Income from quality fixed-income investments – debt and bank deposits – have been drastically reduced in recent years. For this, we can thank the Federal Reserve and its devotion to the cult that low-interest rates and easy money drive economic growth.
They don't. Growth is driven by production and investment. Investment capital is formed when savers offer their capital to entrepreneurs. Savers, in turn, lend their capital when it can generate a sufficient risk-adjusted return.
In this market, quality fixed-income investments fail to provide a sufficient risk-adjusted return. In response, many savers have moved their capital into other assets – most notably, dividend -paying equity investments.
As an income investor, much of my personal capital has found its way to dividend-paying stocks. The High Yield Wealth portfolio is composed primarily of high-yield and dividend-growth investments.
But today I'm faced with a conundrum: many other investors have also taken to dividend-paying equity investments. Increased demand has lowered the overall yield and shrunk the pool of quality investments from which to choose.
In other words, I have to search harder and longer for worthwhile income investments.
To that end, I've broadened my horizons. Over the past year, I've added sovereign debt from emerging markets, as well as equity investments from Canada, France, and South America, to the High Yield Wealth portfolio.
Going offshore for income isn't necessarily bad. Foreign income investments can lower portfolio volatility. These foreign investments tend to have lower correlations with U.S. investments; investors can capture yield while simultaneously lowering portfolio volatility.
But there is a risk to investing outside our borders, particularly in the current environment of quantitative easing. I’m referring to currency risk.
This is genuinely a unique (I should say crazy) market due to the unprecedented stance the world's central banks have taken on their respective countries’ currencies. Today's central bankers believe the less valuable the home currency when compared to another country’s currency, the better.
So while the Federal Reserve continues to issue money at the rate of $85 billion per month, the value of the U.S. dollar doesn't drop off the cliff because other countries’ central bankers have adopted the same currency-flooding strategy.
This creates a problem for investors looking for income in foreign markets. The depreciating foreign currency lowers the income to domestic investors because the foreign investment pays income in its home currency. The currency must then be converted to dollars.
Japan, a market I had recently begun to consider, drove home the risk.
A couple weeks ago, the Bank of Japan promised to do “whatever it takes” to beat deflation. Beating deflation in Japan's case means flooding the market with yen. To do that, the Bank of Japan will purchase a trillion dollars worth of assets, which will be paid for with newly minted yen. More yen lowers the value of each outstanding yen unit. Prices rise in yen because it takes more yen to buy the same good or service.
Concurrently, the yen buys fewer dollars. When the yen is converted to dollars, U.S.-domiciled investors, in turn, receive fewer dollars – or less income.
After the Bank of Japan announced its new easy-money policy, the yen depreciated 7% against the dollar. This was on top of the 17% depreciation in the yen that has occurred since November.
The bottom line is, Japan is another market I can scratch off my list for possible income investments. (I've already scratched off the United Kingdom after the Bank of England announced Mark Carney as its new governor. Carney has hinted at introducing a higher inflation target, which will be achieved by issuing more pounds, thus depreciating the pound.)
That said, I'm not throwing in the towel. As the pool of income opportunities dwindles, I continue to seek other strategies to safely capture high-yield income. Fortunately, I've come up with a few new strategies, which I will put into action in a new investment service coming soon.