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Financial Articles from Hefren-Tillotson

Avoid Extremes When Searching for Income

August 25, 2016

Investors who seek both safety and income may find they receive neither. Not only are high quality bonds trading at near record low yields and record high prices, traditionally safe areas of the equity markets have become expensive. The defensive Utilities, Telecommunications, and Consumer Staples sectors offer reasonably attractive income, but trade at high price/earnings ratios, suggesting modest upside potential and increased downside risk.

As a result, portfolios invested solely in “safe” stocks and bonds may exhibit low yields and expensive valuations. On the other hand, portfolios designed to maximize yield may also exhibit too much risk.

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What should a conservative, income-oriented investor do in this environment? In a word, diversify. Investors should seek to generate income across their portfolios by owning a mix of traditionally safe investments and riskier, higher-yielding securities. Riskier investments include stocks, both in the U.S. and overseas. Stocks also offer the potential for dividend growth. Indeed, S&P 500 dividends have grown at an impressive rate in recent years (chart). Income can be augmented through bond funds that invest in riskier areas of the corporate and municipal bond markets.

In medio stat virtus: Virtue stands in the middle. Income-oriented investors should avoid the extremes of hiding solely in the safest securities or reaching for yield exclusively in risky investments.

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This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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