Investors ‘Starved’ and Searching for Yield, Fidelity Says

While many Fidelity clients are looking at stocks and bonds, close to 10% plan to put their money ‘under the mattress,’ poll finds

Fidelity Investments says most investors are actively looking at dividend-producing stocks and corporate bonds for higher yields in today’s low interest rate environment.

The poll of about 1,200 clients with investable assets of about $250,000 and up was taken during a webcast—Fidelity Viewpoints Forum: Investing for Income—held in Boston on June 13 and released Thursday.

For the next six months, 54% of respondents are bullish about dividend-producing stocks. Fifteen percent are enthusiastic about investment-grade corporate bonds.

As for fixed-income investments, which had returns of about 7% in the last 12 months, only 18% think they can achieve or beat those results over the next 12 months. Some 32% believe their fixed-income returns will drop below 4%, while another 32% expect returns of 4% to 6%.

“This group of high-net-worth investors are realists about this low-interest rate environment, but are not resigned to accepting low returns,” said John Sweeney, executive vice president of Fidelity Planning and Advisory Services, in a press release. “They’re willing to look to alternative products to find yield, but we encourage them not to stretch too far and lose sight of their underlying investment strategy and encounter unnecessary risk.”

Many investors, 44%, say they would put their next investing dollar into U.S. stocks, while 16% would put it into investment-grade corporate bonds, 9% high-yield bonds and 9% “under the mattress.”

Portfolio Thinking

Fidelity’s forum included discussions with five portfolio managers about the U.S. economy, opportunities in emerging markets and the investment universe.

When it comes to investing in high-yield bonds versus dividend stocks, “if you look at the current yield of the S&P 500 Index, it’s nowhere near what you get on high-yield bonds,” said Matthew Conti, a Fidelity portfolio manager. “So dividend-paying equities may make sense if you’re looking for both income and capital appreciation, but the high-yield universe might make more sense if you’re looking primarily for income.

Jeff Moore, another portfolio manager, says investors shouldn’t “chase yield;” they should invest in vehicles that they think are solid. In terms of investments he likes today, he suggests that investors looking at U.S. Treasuries consider some agency mortgages, which can have yields of 3%.

“We like them relative to risks in other sectors, even versus Treasuries,” Moore said at the forum. “It’s a nice place to invest today.”

In terms of stocks, the portfolio manager James Morrow points out that stocks have produced about 1% annualized returns with about 16% annualized volatility over the past 15 years. “It’s a pretty low bar for them to [beat] in the next 15 years,” he said.

He is generally bullish on stocks, which he believes are “cheap” on a relative basis. “And risks are a lot different today—around interest rates, credit risks, et cetera.”

When it comes to utility investing, Morrow says that a benchmark utility index has a yield of “just north” of 4%. “In this yield-starved world and in this world of uncertainty … a utility is state-sanctioned, regulated-return vehicle,” he said, with returns set at about 9-10%.

“This is a pretty attractive nominal rate of return and an excellent source of yield,” the portfolio manager said during the webcast discussion.

“Utilities are having higher yields versus [those of other income-producing] over the past 10 years on average,” continued Morrow. “It’s a pocket of yield in the market to be sure and is very stable.”

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