Where’s the Yield?

September 28, 2011 | Neil S. Capps, CAIA, FDP, Partner, Director of Client Service

Wild uncertainty in the equity markets coupled with European debt concerns have driven U.S. Treasury yields to all-time lows, and left income-driven investors searching for alternative sources of yield. While bonds will always serve as a major component of an income-driven portfolio, the overarching low yield environment has led investors to look beyond the traditional sources of return. This week’s Chart of the Week examines the potential of other asset classes to provide the income streams that have historically been provided by bonds.

As shown above, dividend yields for U.S. large cap equities now exceed that of the 10-year Treasury, and the MSCI EAFE and EAFE Value indices have attractive yields as well, exceeding those of the BarCap Global Bond Index and the BarCap U.S. Corporate Bond Index. The NCREIF Property Index has generated an annual income return of 6.44% as of June, 30, 2011, which provides an opportunity for greater portfolio diversification with minimal correlation. These asset classes are more volatile than traditional bond portfolios in regards to capital appreciation, but the income generation has become favorable to many options in fixed income. While it would be premature to label these trends as a new regime, it will not be surprising to see income-driven investors tilt their portfolios to include greater allocations of higher yielding (and traditionally more volatile) asset classes.