Practical Applications of Income Investing in a Low-Yield Environment

Abstract

In Income Investing in a Low-Yield Environment, from the Winter 2021 issue of The Journal of Wealth Management, David M. Blanchett of PGIM addresses the lack of relevant investment strategies aimed at income-focused investors. Drawing on historical financial data regarding portfolio returns as well as bond and equity yields, he estimates optimal portfolio risk levels for investors focused on income return rather than price return.

Although Blanchett notes that bond yields have exceeded dividend yields by approximately 1.5% on average historically, in market conditions where dividend yields equal or exceed bond yields—as is true in the current market—higher equity allocations are more favorable. This is particularly true for income-driven investors with a neutral or low risk aversion, as higher equity allocations increase portfolio risk. Thus, in a low-bond-yield environment, it may be appropriate for investors looking to generate income to consider increasing equity allocations.