6 Steps to Snare Higher Yields in Retirement

Income investing is supposed to be like watching a predictable movie that you’ve seen a dozen times before.

(Image credit: Getty Images)

Income investing is supposed to be like watching a predictable movie that you’ve seen a dozen times before. But lately, it has been full of plot twists. Over the past few years, most income investors settled back with their popcorn for a long period of rising interest rates, believing the Federal Reserve would slowly but surely hike rates back to more normal levels. For bond investors, that would mean some temporary pain—when rates rise, bond prices fall—but it would also bring the welcome relief of higher yields.

Then the Fed ripped up the script. After three years of fairly steady rate increases, the Fed left rates unchanged early this year and signaled that it’s unlikely to raise rates at all in 2019. Instead of bracing for further rate increases, many bond traders started betting that the Fed would even cut rates this year. (Kiplinger expects the Fed to stand pat.) The shifting expectations drove new money into bonds of all stripes. The Bloomberg Barclays U.S. Aggregate Bond Index gained nearly 3% in the first quarter, while junk bonds rallied more than 7%.

“The theme was, ‘Look out, rates are rising. You’ll get killed in bond funds,’ ” says Warren Pierson, senior portfolio manager at Baird Advisors. “That hasn’t happened at all.”

Retirees who depend on high-quality bonds for income may be heaving a sigh of relief, but this movie isn’t over yet. The bond rally at the start of the year left few fixed-income bargains, and the Fed’s interest-rate pause means that rates on cash and near-cash holdings will remain stuck at relatively low levels. The shift in Fed policy should also prompt investors to reevaluate holdings, such as floating-rate funds, that they may have scooped up for protection against rising rates. Income investors turning to dividend-paying stocks, meanwhile, may find that good values are scarce in a market that has recently touched record highs.

So where should retirees turn for investment income? Terri Spath, chief investment officer at Sierra Investment Management, suggests focusing on the three “D”s: diversification, defense and distribution. Yes, you want a decent yield, but don’t rely on any one asset class for income—and use particular caution when approaching investments with juicy yields. “This is not a time when investors want to be heroic or take on excessive amounts of risk,” Pierson says.

But this isn’t a time to hide out in cash, either. Retirees need to pay the bills and ideally earn more than the 2% inflation rate. Fortunately, income investors willing to cast a wide net can find some good buys in everything from short-term bonds to dividend-paying stocks and preferred securities. Here are six ways to find market-beating yields of 2.5% to 6%, while keeping risk in check.


Unless otherwise noted, data are as of May 9.

Eleanor Laise
Senior Editor, Kiplinger's Retirement Report
Laise covers retirement issues ranging from income investing and pension plans to long-term care and estate planning. She joined Kiplinger in 2011 from the Wall Street Journal, where as a staff reporter she covered mutual funds, retirement plans and other personal finance topics. Laise was previously a senior writer at SmartMoney magazine. She started her journalism career at Bloomberg Personal Finance magazine and holds a BA in English from Columbia University.