Equity Income
Investing in the stock market can be a risky endeavor. But many investors are looking for returns higher than they can find from the safest bets like government bonds. Those who are interested in getting a steady stream of income from their investments while keeping their risk relatively low will want to consider focusing on gaining equity income.
What Is Equity Income?
Equity income is income that investors earn via stock dividends, which is money that companies pay to shareholders out of their net profits to reward them for investing. You can get dividends either by owning shares of stocks or by owning shares of mutual funds or exchange-traded funds (ETFs) that invest in dividend-paying companies.
Equity income is appealing to conservative investors who are focused on generating long-term income. The large, established companies that pay dividends often have an annual target for a dividend payout rate that they incorporate into their financial planning. This means that investors can count on this income, at least more than they can count on other returns from owning stocks.
That being said, it’s important to know that companies do not have a legal obligation to pay dividends; they can reduce or end them whenever they want for any reason. Dividends are likely to shrink if the company’s profits shrink. But the reverse can be true too — a banner year for the company may result in higher dividends.
‘Income’ Stock vs. ‘Growth’ Stock
Stocks that have a record of paying a regular dividend are knowns as “income stocks.”
These stocks contrast to “growth” stocks, which tend to have a higher level of risk and expectation of return.
The companies that pay income stocks tend to be large, well run, and more stable than the larger equity market. An appealing income stock will be one with less volatility than the market as a whole, but with better returns than are available from other income investments, such as U.S. Treasury bonds.
True to its name, a growth stock focuses more on growth than stability; it’s a share in a company that is on track to grow faster than the market but probably will not be paying any dividends to shareholders. These types of companies tend to reinvest their profits into the business to spur more growth, which might mean high returns but also leads to more potential volatility.
What Is an Equity Income Fund?
An equity income fund is a type of mutual fund that focuses investment on a range of dividend-paying stocks. These funds may target their investments in various ways: by a benchmark dividend yield, a geographical focus, or target companies’ credit-ratings.
As with other types of mutual funds, equity income funds give investors the opportunity to diversify, since they are able to buy an interest in multiple companies via purchasing even a single share of the fund. This provides less exposure to risk than buying individual stocks. Since income stocks are already on the lower end of the risk spectrum, buying equity income funds is a particularly good way to reduce risk.
What Are Forward and Trailing Dividend Yields?
An equity stock’s or fund’s dividend yield is the amount of equity income shareholders receive. Each one has a forward dividend yield and trailing dividend yield, which can help investors assess the payout as a fraction of the price.
A forward dividend yield is an estimate of the dividend yield for the current year, derived from available information. The trailing dividend yield is the amount of the dividend payout during the previous year, based on share price.
Benefits of Equity Income Investing
There are several good reasons to invest in equity stocks and funds.
Long-term income
Investors often seek to hold income stocks for the long term. Those who favor these types of investments prioritize capital appreciation and income instead of rapid growth. One way investors can increase their long-term income from equity stocks is through dividend reinvestment, which allows an investor to reinvest dividends in fractional shares of the stock or fund.
Lower risk than growth stocks
Dividend-paying stocks are seen to be generally less risky than stocks that don’t pay dividends. They carry more risk than other common income investments, such as bonds and cash, but they are less risky than other stocks and mutual funds, particularly growth stocks.
Relatively high potential returns
Compared to other income investments like bonds or money market funds, equity income stocks and funds are apt to provide higher returns. While they may not generate the high returns of growth stocks, they will be a more lucrative investment than a cash account.
To provide an idea of returns, these were the top five dividend-paying stocks on the Russell 1000 stock market index as of June 1, 2021:
- OneMain Holdings Inc. (OMF) (forward dividend yield of 13.06%)
- Annaly Capital Management Inc. (NLY) (forward dividend yield of 9.69%)
- AGNC Investment Corp. (AGNC) (forward dividend yield of 8.03%)
- New Residential Investment Corp. (NRZ) (forward dividend yield of 7.46%)
- Equitrans Midstream Corp. (ETRN) (forward dividend yield of 7.35%)
FAQs about Equity Investing
Q: Who should use an equity income strategy?
A: Investors with relatively long-term time horizons for their investing should consider this strategy. Those who need cash-generating investments for major needs like funding retirement can particularly benefit from receiving dividends.
Q: Which kind of stocks are the best fit for an equity income portfolio?
A: An equity income portfolio should focus on domestic, large-cap, and high-profile stocks — companies like Apple, Microsoft, Johnson & Johnson, and Verizon, for example. Add in some mid-size companies and international large cap stocks and you’ll end up with a diversified mix. Try to avoid stocks from companies that have cut their dividend in the past.
Q: What would make you want to sell a stock?
A: Investors should look for dividend yields that are as high as possible. It is a good idea to sell when the price of a dividend stock appreciates faster than the growth of the dividend, meaning that the dividend effectively yields less over time. It’s also smart to sell stocks of companies that are paying out a large percentage of earnings in dividends.
4 Ideas to Remember About Equity Income
- Equity income is a good way of securing long-term income, and reinvesting dividends can make a big difference in your overall returns over time.
- Equity income investing focuses on achieving relatively low risk and relatively high return — a good middle ground between risky growth stocks and extremely safe but less lucrative income investments like bonds.
- Income stocks, which pay dividends, are usually shares of large, established companies.
- Investing in equity funds allows investors to diversify their holdings while keeping risk relatively low.
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The information and data are as of the July 13, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Active ETFs
An Exchange Traded Fund (ETF) is an investment vehicle that bundles a diversified portfolio of stocks and bonds, with shares sold on the stock exchange.
While ETFs started as passive investment vehicles, there are many that are now actively managed — overseen by fund managers who choose stocks and/or bonds in an effort to achieve above-market returns. These managed funds are called actively managed ETFs or active ETFs.
How Do ETFs Work?
An ETF functions like a cross between a stock and a mutual fund. ETFs are traded on an exchange like a stock. Yet these funds are comprised of shares of many stocks and bonds, like a mutual fund. As such, an ETF is a low-cost and tax-efficient option to invest in a variety of asset classes and investment strategies.
ETFs tend to have lower annual expenses than mutual funds, but due to the fact that they are traded like stocks, they come with higher transaction costs such as commissions, bid-ask spreads, and other fees.
What Is an Active ETF?
Most ETFs are passively managed — they track an index such as the S&P 500 or the Nasdaq. But as ETFs have grown in popularity, more and more of them have become actively traded, meaning that the fund’s manager actively buys or sells stocks and/or bonds to try to beat the market and generate higher returns.
Despite the growth of active ETFs, they are still quite a small part of the overall ETF market. There were more than 500 actively managed ETFs in the U.S. in 2021, which accounted for about $193 billion in assets under management. That may seem like a lot, but these comprise less than one-fifth of all U.S. ETFs and make up about 3.5% of the total dollar amount invested in ETFs.
Why Are Active ETFs Surging?
The market for ETFs has more than quadrupled in less than a decade, leaping from $1 trillion in 2010 to more than $4 trillion in 2019. In 2018 alone, institutions currently investing in ETFs bumped average allocations in these funds to 24.8% of total assets, a significant increase from 18.5% in 2017. This phenomenal growth is driven by enthusiasm among institutional investors: 78% of institutional investors prefer ETFs to other index vehicles, according to a 2019 study of ETFs by Greenwich Associates.
There are several catalysts behind this surge in active ETFs, including the following.
No Minimum Costs
Active ETFs have a far lower barrier to entry than mutual funds, which is the other actively managed product people invest in. Actively managed ETFs do not require a minimum investment, unlike mutual funds, which typically demand an initial outlay that can run into the thousands of dollars. An investor can buy a single share or fraction of a share of an ETF, allowing them to add an actively managed investment to their portfolio for as little as $1. While it’s important to be alert to fees and commissions associated with ETFs, many brokerages now offer commission-free trading, which makes ETFs even more affordable and accessible.
Tax Advantages
ETFs are known for tax efficiency in contrast to traditional mutual funds. ETFs are often more tax-efficient because they are index funds, which have fairly low turnover and thus provide less chance to realize gains when stocks or bonds are sold. More importantly, ETFs have a particular structure that is even more central to their tax efficiency. Shares of ETFs are created and destroyed through in-kind transactions that take place between the fund’s sponsors and an organization called an authorized participant. Due to this set-up, ETFs don’t usually have to directly sell positions from their portfolios to meet redemptions and can in this way avoid taxable capital gains distributions.
Rapid Risk Management
Volatility in world events and economic circumstances in the last few years has left traders with a taste for being able to easily and rapidly manage risk as things change. As investors seek to reposition their portfolios to address a variety of risks, ETFs are a good tool to actualize specific changes without undue hassle. Other characteristics of ETFs, such as execution speed, single-trade diversification, and liquidity, are also helpful in mitigating risk.
Versatility
Institutional investors continue applying ETFs to more and more portfolio functions. This is possible because these funds have phenomenal versatility and can be applied to a wide range of strategic and tactical goals. It helps their popularity that institutional investors tend to prefer ETFs for factor-based and other specialized exposures.
Downside Protection
Early in 2021, actively managed ETFs clocked in at $200 billion in combined assets under management. Investors continue to seek out high returns with robust downside protection in an economic environment that remains in turmoil. Active management can be a key to that downside protection, and active ETFs are an affordable and accessible option for investors.
What Are Common Active ETF Applications?
- Tactical adjustments: Strategically tweak a portfolio to increase or reduce exposure to certain styles, regions, or countries.
- Strategic allocation: Bolster a portfolio with a long-term strategic holding.
- Rebalancing: Reduce risk between rebalancing cycles.
- Portfolio management: Round out and balance strategic asset allocation.
- Global diversification: Get access to foreign markets.
- Cash flow management: Help maintain liquidity.
- Transition enablement: Enable smooth management transitions.
- Risk reduction: Mitigate risk and hedge changes in allocation.
Pros and Cons of Active ETFs
Pros
- Active ETFs do not have investment minimums, and thus have a low barrier to entry.
- Many brokerages offer commission-free trading, making ETFs affordable and accessible.
Cons
- Active management does not necessarily translate to higher returns.
- Active ETFs charge higher fees than passive ETFs regardless of performance.
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The information and data are as of the June 21, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Global Investing
Global Investing
U.S. investors tend to stay close to home, prioritizing domestic stocks and funds. But non-U.S. markets comprise 57% of global investment opportunities, which means that close to half of those opportunities exist beyond U.S. borders. Some of the world’s largest technology, energy, and financial companies are international, such as Samsung in South Korea, Mitsubishi in Japan, ING in the Netherlands, and Allianz in Germany.
What Is Global Investing?
For many investors in the U.S., going “global” means investing in European companies. But this is a limited — and limiting — view of global investing. There is plenty of energy in non-U.S. and non-European markets around the world, from Southeast Asia to South America to Africa and beyond.
Global investing means taking all of the markets around the world into consideration and putting some of your investment dollars in stocks and funds outside of the U.S. and Europe.
Global Fund vs. International Funds
In the world of investing, “global” and “international” are not interchangeable terms the way they are in other contexts. Global funds and international funds are distinct, with different rules, goals, and opportunities.
Global funds are comprised of securities from around the world, including the investor’s home country. Global funds give investors the chance to diversify and reduce country-specific risk while still including their own country in their investment portfolio.
International funds, on the other hand, contain securities from around the world with the exception of the investor’s home country. These funds are a way for investors who already have a robust domestic portfolio to diversify outside that sphere.
Why Invest Globally?
Investing globally — and for U.S. investors, specifically beyond the U.S. and Europe — is an effective way to reduce risk in a portfolio and also opens up the door to investing in all sorts of opportunities that don’t exist in one’s home country.
As we pull out of the acute phase of the coronavirus pandemic, the economies of emerging-market and developing economies are projected to grow faster than the United States. These countries are on track to be the largest contributors to global GDP by 2042, and by 2050 will account for almost 60% of the world economy.
Accordingly, developed and emerging markets are beating the S&P 500 so far this year, with China, South Korea, and Japan showing strongest growth. In fact, some analysts are predicting that foreign equities might outperform U.S. stocks as a whole in 2021.
The growth of global funds in particular is a huge opportunity for investors. PwC predicts that global assets under management will reach $145.4 trillion by 2025, almost double the $84.9 trillion that was under management in 2016.
Investors who overlook these opportunities are limiting their ability to diversify, which increases risk in their portfolios. Owning a globally diversified portfolio protects investors against seeing serious losses when stocks in one country suffer setbacks that aren’t felt elsewhere.
Overlooking global investments also causes investors to miss out on some phenomenal investment options. There are exciting things unfolding in business around the world — in Brazil and China and Eastern Europe, for example — and U.S. investors who aren’t tapped into global options will lose a chance to capitalize on that energy.
How to Invest Globally
While global investments are unlikely to make up a majority of a U.S. investor’s portfolio, it’s a good idea to target a sizable chunk of assets to invest overseas. According to Christine Benz, Morningstar’s director of personal finance, professionally managed asset allocations typically target 25-33% of the portfolio in overseas investments. This can be a good benchmark for individual investors to look to.
Investors can add global investments to their portfolios by buying stocks or exchange-traded funds (ETFs).
Stocks
There are a number of ways to invest in foreign stocks. U.S. depositary banks issue American Depository Receipts (ADRs) that attest to a right to ownership of a share or fraction of stock of a foreign company that trades in U.S. markets. U.S. Investors usually find it more convenient to own the ADR instead of the share of foreign stock itself. Alternately, depositary banks in an international market, usually in Europe, issue Global Depository Receipts (GDRs) that attest to ownership of shares in a non-U.S. company. GDRs are available to institutional investors in and outside the U.S.
Some investors may find it advantageous to invest directly in the stocks or bonds of foreign entities, perhaps with an eye toward acquiring a decisive stake in a company. This is not a good strategy for the casual investor, as there are many complex factors involved in these transactions, such as tariffs and trade barriers.
Exchange-traded funds (ETFs)
ETFs group many different stocks or bonds — sometimes thousands — into a single fund that is traded on the stock exchange like an individual stock. These funds can focus on global stocks and sometimes have a regional focus. Individual investors are not allowed to buy mutual funds that are based outside their home country, so investors should buy a fund based in their own country that includes global investments.
4 Ideas to Remember About Global Investing
Global investing is a good strategy for those who want to reduce their risk, open themselves up to exciting new opportunities, and become more sophisticated in their investing approach. Here are four important ideas to remember when considering global investing:
- U.S. investors should look beyond Europe to truly diversify their investing globally. Great opportunities exist in regions all over the world.
- Global investing allows you to diversify your money and mitigate your risk so that when stocks in a given country take a hit, your portfolio stays strong.
- Being open to investing beyond the U.S. and Europe opens up many phenomenal investment opportunities that you may have not known existed.
- Global funds are a fast-growing and potentially lucrative investment opportunity.
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The information and data are as of the June 17, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Alternatives
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Retirement Income
From pay cuts to reduced employer retirement savings matching, COVID has no doubt impacted retirement for many people planning to retire both in the near and far future. According to a MoneyRates survey conducted in late March 2020, 36.4% of Americans within 20 years of retirement expect the COVID-19 crisis will delay their retirement. That number might not seem so surprising when you consider that 37.4% of workers aged 45 to 64 have lost their jobs or a portion of their income, according to the same survey.
Even before the pandemic, only a quarter of Americans were on track with their retirement savings, inclusive of those in their 50s, according to the Edward Jones study, The Four Pillars of the New Retirement. In part, that is because what you need to retire is not a small number. According to Fidelity Investments, to retire by age 67, you should have 10 times your income saved.
While many employees are anticipating that they will be working longer to secure a sustainable retirement savings as a result of COVID’s economic impacts, others are retiring earlier than they planned in turn making their retirement a lot less comfortable.
Here’s how COVID and the down economy are impacting retirement.
Retirement 2021: Many people Are Retiring Early
Lots of older Americans are suddenly finding themselves out of work.
Some are actively hoping to rejoin the workforce. Between September and October 2020, the number of job seekers aged 55 and older who were out of work for 27 weeks or more and still looking jumped from 14% to 26.4%, according to the Bureau of Labor Statistics. Months later in December 2020, the unemployment rate held steady at 6.7%— meaning that older job seekers are facing increased levels of competition that is not likely to go away anytime soon.
Unfortunately, many older job seekers will never make it back to the workforce, at least not in full-time roles comparable to their previous positions. Approximately 4 million workers age 55 to 70 are expected to be forced into early retirement due to the COVID-19 pandemic, according to a report from the Retirement Equity Lab at The New School.
For those who have the option of staying in their current position, health and safety are a very real concern. The immune system becomes weaker as we age making older populations more vulnerable to COVID-19. The fact is that 95% of COVID-19 deaths in the US have occurred among people aged 50 or older. Workers between the ages of 55 and 65 simply face a greater risk than their younger counterparts, particularly if they have underlying health conditions, such as obesity, diabetes or high blood pressure. This means that older members of the workforce— those closer to retirement— face a challenging dilemma if they cannot work remotely: is the risk of getting sick worth returning to work at all?
For those retiring early, paying for health care costs before Medicare eligibility at age 65 can be extremely expensive. For those lucky enough to get a severance package, a continuation of health benefits for a determined length of time can be instrumental in making a more comfortable retirement possible.
Also, early retirees by choice or default should consider that claiming Social Security benefits earlier than planned can mean a smaller monthly benefit. A person’s Social Security benefit automatically increases 8% every year beginning at age 62 (for people born after 1943) until age 70.
For those retiring early as a result of the pandemic-stricken economy, they are generally doing so with less savings and fewer benefits available to them. This means that retirement itself means managing tighter finances for the long-haul.
Retirement 2021: Others are working longer
Not everyone is fast-tracking retirement. Even before the pandemic, one in four working households were not contributing to retirement savings. The pandemic has resulted in an additional 18% of households contributing less toward retirement, most to help buffer some loss of income, according to a survey by Bankrate.
According to The Four Pillars of a New Retirement report, nearly a third of Americans (29%) planning to retire have pushed out their plans for financial reasons related to the COVID-19 pandemic.
In part, this is because many older Americans are not just supporting themselves. One in four of all parents with adult children, or 24 million Americans, have had to provide their children with financial support due to the COVID-19 pandemic. People need more cash fast in the down economy, and they are looking to their retirement funds to get it.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020, made it easier than ever for people to tap into their retirement savings. Through the CARES Act, “early withdrawals taken in 2020 due to COVID-19 hardships will not be subject to the 10% additional tax under Sec. 72(t) or the 25% additional tax on SIMPLE IRAs under Sec. 72(t)(6), if certain conditions are met.”
People are taking advantage of this access to retirement funds. According to a survey by Bankrate, upwards of 27% of those with retirement accounts have either already tapped into them or plan to do so.
The Power of Income
Experts warn against taking early withdrawals, if possible. Thinking long-term and staying the course by keeping up retirement contributions and taking full advantage of an employer match, for example, will pay off in the long run. To prevent having to dip into retirement savings, experts recommend prioritizing an emergency fund.
It’s also worth remembering that with the markets as volatile as they are, by taking an early withdrawal, you risk selling your investments at a lower value than they might be worth in the future. Even if the markets are doing well, by taking out retirement money early, you lose out on the potential future gains of that retirement plan money.
This is why an income-focused approach can be so powerful in the lead-in to and early years of retirement. With income coming in every month or quarter, your portfolio is not so much left to the whims of the market and can continue to build and live off of your nest egg for years to come.
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The information and data are as of the April 14, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
