Three key asset classes that can help generate income in a low-yield world
Income-seeking investors continue to be challenged by paltry real yields — in the decade of the 1990s, real yields on 10-year US Treasuries averaged 3.60%. But in the decade of the 2010s, they averaged just 0.63%.1
At Invesco, we believe there are three key ingredients to an income portfolio built for today’s challenges:
Bonds are often used as a portfolio ballast — generally offering lower volatility than equities and alternatives like real estate, as shown in the chart. Even within a diversified income portfolio, this remains an important function. However, there are important differences between types of bonds that income-seeking investors should be aware of:
Investment grade versus high yield.
High yield bonds have lower credit ratings in exchange for this higher risk, they pay higher yields.
Long-duration versus short-duration.
Long-duration bonds have a longer time to maturity and are therefore more vulnerable to an increase in interest rates.
Taxable versus non-taxable.
Municipal bonds are exempt from federal income tax and may be exempt from state and local taxes.
Source: FactSet Research Systems, as of Apr. 30, 2019. 10-year annualized volatility is used.
Dividend-paying stocks offer another source of income for investors. Some strategies focus on stocks that pay the highest yields, and others look for companies that are growing their dividends. The path you choose depends on your objectives and time horizon.
The chart below shows two hypothetical investments:
- The “high yielders” pay a 3.5% yield with a 6% dividend growth rate.
- The “dividend growers” pay a 2.5% yield with a 12% dividend growth rate.
During a time horizon of less than seven years, the high yielders generate more income. But during longer time horizons, the higher growth rate of the dividend growers means that they are paying higher yields in the long term.
The yield on the hypothetical investment is greater with high yielders if your horizon is less than seven years. But the yield is higher with dividend growers after seven years.
Source: Invesco. This is a hypothetical illustration and does not represent actual product performance. A yield of 3.5% and dividend growth rate of 6% were used on the high yielder portfolio because they are representative of funds that are focused on dividend yield. A lower 2.5% yield and higher 12% dividend growth rate are representative of funds that are focused on dividend growth.
As shown in this chart, specialty income asset classes have historically provided the highest yields of these groups, along with the highest volatility.
This chart illustrates the diversification potential of these asset classes, based on their historical correlation with equities.
Sources: FactSet Research Systems and Salient Research. MLPs represented by the Alerian MLP Index, REITs by the FTSE NAREIT Equity REIT Index, and private credit by the Cliffwater Direct Lending Index. For MLPs and REITs, data is for the 10- year period ending April 30, 2019. For private credit, data begins on the index inception date of Sept. 30, 2015, to April 30, 2019.
Specialty income vehicles defined
Master limited partnerships (MLPs) offer publicly traded, dividend-paying securities and are generally focused on energy infrastructure such as pipelines, storage facilities and processing plants.
Real estate investment trusts (REITs) are companies that own, operate or finance income-producing real estate.
Private credit includes a range of credit strategies offered to companies around the world.
At Invesco, we have an array of strategies that can be used to build a diversified income portfolio.
Short duration income
|Invesco Conservative Income Fund (ICIVX)||An actively managed mutual fund that seeks to provide capital preservation and current income while maintaining liquidity.|
|Invesco Ultra Short Duration ETF (GSY)||An actively managed ETF that seeks to provide returns in excess of cash equivalents while also seeking to provide preservation of capital and daily liquidity.|
|Invesco Oppenheimer Limited Term Bond Fund (OUSGX)||An actively managed mutual fund that seeks income and typically invests in limited-term, US investment-grade fixed income instruments.|
|Invesco Oppenheimer Senior Floating Rate Fund (OOSAX)||An actively managed mutual fund that seeks tax-free income and typically invests in investment grade bonds.|
|Invesco Variable Rate Investment Grade ETF (VRIG)||An actively managed ETF that seeks to generate current income while maintaining low portfolio duration as a primary objective and capital appreciation as a secondary objective.|
|Invesco California Tax Free Income Fund (CLFAX)||An actively managed mutual fund that seeks to provide a high level of current income exempt from federal and California income tax, consistent with the preservation of capital by investing primarily in California municipal securities rated investment grade at the time of purchase.|
|Invesco High Yield Municipal Fund (ACTHX)||An actively managed mutual fund that seeks federal tax-exempt current income and taxable capital appreciation by investing primarily in medium- and lower-grade municipal securities.|
|Invesco Intermediate Term Municipal Income Fund (VKLMX)||An actively managed mutual fund that seeks a high level of current income exempt from federal income tax, consistent with preservation of capital by investing primarily in intermediate municipal bonds that are investment grade at the time of purchase.|
|Invesco Limited Term Municipal Income Fund (ATFAX)||An actively managed mutual fund that seeks monthly income exempt from federal income tax by investing primarily in short-intermediate municipal securities that are investment grade at the time of purchase. The fund does not currently invest in securities which are subject to the federal alternative minimum tax.|
|Invesco Municipal Income Fund (VKMMX)||An actively managed mutual fund that seeks a high level of current income exempt from federal income tax, consistent with preservation of capital, by investing in portfolio of long-maturity municipal bonds.|
|Invesco New York Tax Free Income Fund (VNYAX)||An actively managed mutual fund that seeks a high level of current income exempt from federal, New York state and New York City income taxes, consistent with preservation of capital by investing primarily in New York municipal securities rated investment grade at the time of purchase.|
|Invesco Pennsylvania Tax Free Income Fund (VKMPX)||An actively managed mutual fund that seeks to provide only Pennsylvania investors with a high level of current income exempt from federal and Pennsylvania state income taxes and, where possible under local law, local income and personal property taxes, through investment primarily in a varied portfolio of medium and lower grade Pennsylvania municipal securities.|
|Invesco Short Duration High Yield Municipal Fund (ISHAX)||An actively managed mutual fund that seeks federal tax-exempt current income and taxable capital appreciation by investing primarily in shorter duration medium- and lower-grade municipal securities.|
|Invesco Oppenheimer Short Term Municipal Fund (ORSTX)||An actively managed mutual fund that seeks to deliver attractive after-tax total returns.|
|Invesco Oppenheimer Rochester High Yield Municipal Fund (ORNAX)||An actively managed mutual fund that seeks tax-free income. The strategy typically seeks high-yield as well as investment-grade municipal bonds.|
Other bond income
|BulletShares ETF Suite||These are defined maturity bond ETFs that are available with a variety of maturity dates. These include corporate bond, high yield corporate bond and emerging market debt portfolios.|
|Invesco Oppenheimer International Bond Fund (OIBAX)||An actively managed mutual fund that seeks total return by investing across foreign exchange, interest rates and credit securities in international and emerging markets.|
|Invesco Core Plus Bond Fund (ACPSX)||An actively managed mutual fund that seeks total return comprised of current income and capital appreciation.|
|Invesco Dividend Income Fund (IAUTX)||An actively managed mutual fund that seeks to achieve income and long-term capital appreciation.|
|Invesco Oppenheimer S&P Ultra Dividend Revenue ETF (RDIV)||This ETF invests in the securities in the S&P 900 Index with the highest trailing dividend yield. Each of these securities is then weighted by top line revenue, instead of market capitalization.|
|Invesco Dividend Sustainability Portfolio (DVST)||A unit investment trust that seeks above-average capital appreciation by investing in a portfolio of stocks derived from the Standard & Poor’s 500 Dividend Aristocrats Index. This index consists of stocks of those companies in the S&P 500 Index that have increased their actual dividend payments in each of the last 25 years.|
|Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)||This ETF seeks to track the S&P 500 Low Volatility High Dividend Index, which is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility.|
|Invesco Select 10 Industrial Portfolio (SDOW)||A unit investment trust that seeks above-average total return by investing in a portfolio consisting of the 10 highest dividend-yielding stocks in the Dow Jones Industrial Average.|
|Invesco Equity and Income Fund (ACEIX)||An actively managed mutual fund that seeks current income and, secondarily, capital appreciation.|
|Invesco Oppenheimer SteelPath MLP Income Fund (MLPDX)||An actively managed mutual fund that seeks total return and typically invests in 35 to 45 MLPs. The fund seeks to maximize monthly income and invests primarily in small- and mid-cap names.|
|Invesco Oppenheimer SteelPath MLP Alpha Fund (MLPAX)||An actively managed mutual fund that seeks total return and typically invests in 20 to 25 MLPs. The fund seeks the best potential long-term distribution growth and invests primarily in large-cap names.|
|Invesco Oppenheimer SteelPath MLP Select 40 Fund (MLPFX)||An actively managed mutual fund that seeks total return and typically invests in a minimum of 40 MLPs. The fund seeks to provide broad, diversified exposure to the MLP sector and seeks lower volatility than the Invesco Oppenheimer SteelPath MLP Income Fund and the Invesco Oppenheimer SteelPath MLP Alpha Fund.|
1 Source: Bloomberg, L.P. Real yields are adjusted for inflation. 1990s data from January 1990 through December 1999. 2010s data from January 2010 through April 2019.Index returns do not represent fund returns. An investor cannot invest directly in an index. Index proxies as follows:
Limited-term bonds: Bloomberg Barclays U.S. Aggregate 1-3 Year Index, which is designed to measure the performance of the short-term US corporate bond market.
Conservative income: Bank of America Merrill Lynch US Treasury Bill Index, which tracks the performance of the US dollar-denominated US Treasury Bills publicly issued in the US domestic market with a remaining term to final maturity of less than 3 months.
Investment grade municipals: The ICE BofAML US AAA Municipal Securities Index, which tracks the performance of U.S. dollar–denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market and includes only securities with a credit rating of AAA.
Ultra-short duration bonds: Bloomberg Barclays 1-3 Month U.S. T Bill Index, which is designed to measure the performance of public obligations of the US Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.
Core bonds: Bloomberg Barclays U.S. Aggregate Bond Index, which is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
Variable rate investment grade bonds: Bloomberg Barclays US Floating Rate Note Index, which measures the performance of US dollar-denominated, investment grade, floating rate notes across corporate and government-related sectors.
International developed bonds: FTSE World Government Bond Index WGBI (Non-USD), which measures the performance of fixed-rate, local currency, investment-grade sovereign bonds from over 20 countries in a variety of currencies.
High yield municipals: ICE BofAML U.S. High Yield Municipal Index, which tracks the performance of below investment grade, but not in default, tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.
High yield bonds: JP Morgan Domestic High Yield Index, which is an unmanaged index of high yield fixed income securities issued by developed countries.
Senior loans: Credit Suisse Leveraged Loan Index, which represents tradable, senior-secured, US-dollar-denominated, noninvestment-grade loans.
MLPs: Alerian MLP Index, which is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology.
REITs: FTSE NAREIT Equity REIT Index, which is an unmanaged index considered representative of US REITs.
Private credit: Cliffwater Direct Lending Index, which seeks to measure the unlevered, gross of fee performance of US middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies that satisfy certain eligibility criteria.
The S&P 500 Low Volatility High Dividend Index measures the performance of the 50 least-volatile high dividend-yielding stocks in the S&P 500 Index. The index is designed to serve as a benchmark for income-seeking investors in the US equity market.
The S&P 500 Dividend Aristocrats Index includes companies that are currently members of the S&P 500 Index, have increased dividend payments each year for at least 25 years, and meet certain market capitalization and liquidity requirements.
The Dow Jones US Select Dividend Index tracks the performance of the 100 stocks with the highest dividend yields on the Dow Jones US Total Market Index.
The S&P 900 Dividend Revenue-Weighted Index is an investable index that seeks to measure 60 of the highest-yielding stocks among those with relatively lower payout ratios from the S&P 900 and weights them by their revenues.Important information
Diversification does not guarantee a profit or eliminate the risk of loss
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest. Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.
Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.
There is no assurance that these mutual funds will achieve their investment objectives. Funds are subject to market risk, which is the possibility that the market values of securities owned by these funds will decline and that the value of the fund shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in these funds. Please be aware that these funds may be subject to certain additional risks. See the prospectus for complete details about the risks associated with each fund.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.
The Fund’s return may not match the return of the Index.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 80,000, 100,000, 150,000 or 200,000 Shares.
Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
Securities that pay high dividends as a group can fall out of favor with the market, causing such companies to underperform companies that do not pay high dividends.
There is no assurance that a Fund will provide low volatility.
In general, equity values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc. and broker dealers including Invesco Distributors, Inc. Both firms are indirect, wholly owned subsidiaries of Invesco Ltd.
There is no assurance the trust will achieve its investment objective. An investment in this unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. This trust is unmanaged and its portfolio is not intended to change during the trust’s life except in limited circumstances. Accordingly, you can lose money investing in this trust. The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.
Before investing, investors should carefully read the prospectus and consider the investment objectives, risks, charges and expenses. For this and more complete information about the trust(s), investors should ask their advisers for a prospectus or download one at invesco.com/unittrust.
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