In every investing environment, there will be some investors who focus more on one particular sector or asset type than others – for many investors approaching retirement, achieving some minimum level of yield is often sought to provide regular income in retirement years, safeguarding the principal one might wish to hold on to for a “rainy day,” with the expectation that such investments will continue to appreciate over time.
With high yielding stocks taking a hit in recent months due to rising interest rates and a reduced appetite for such investments overall by the broader stock market, fixed income options and exchange traded funds (ETFs) have become two options investors seeking higher than average yields have looked to for a decent rate of return.
Investors attempting to achieve higher yields than their investing counterparts often end up taking higher than average risks, with the risk/reward relationship not always congruent to one’s long-term investment goals.
In the case of many funds (mutual funds and ETFs included), the net yield one is able to garner from an investment (i.e. the overall yield minus the expense ratio of the fund) can turn out to be much lower than expected, reducing the overall impact of higher yields, and amplifying the risk an investor takes in seeking such a high yield in the first place.
Dividend income is also taxed, meaning the triple net bottom line income an investor will receive from a high yield investment may not be nearly as much as anticipated up front – as always, for those looking to calculate the amount needed each month in a backwards fashion, be sure to include expense ratios and taxes up front.
Invest wisely, my friends.
