Steady Advice for Worried Income Investors

This column and Kiplinger’s In­vesting for Income, the monthly newsletter over which I preside, attract many comments and queries. This month I will address questions from readers, many of whom are skittish about the ascension of Donald Trump to the presidency and the stock market’s ebullient early reaction to the new administration.

Sometimes I’m asked about a specific stock or fund, but lately I’ve been getting more inquiries about big-picture matters. How to handle the threat of escalating interest rates is a common topic. Another is whether it’s time to back off from utility stocks, real estate investment trusts, master limited partnerships and other popular antidotes to low savings yields. Then come questions that boil down to whether Trump’s penchant for confrontation will destabilize markets.

Even big-picture questions are often couched in practical terms. One worried reader wondered if he should stop reinvesting the tens of thousands of dollars’ worth of dividends he collects every year into more shares and use the payouts to build a ladder of certificates of deposit. (My answer: Go ahead. That’s a clever way to trim your stock allocation without selling shares and creating a tax liability.) Another reader asked if he ought to leave $120,000 he’ll need in six months in a checking account or chase a higher return. (My reply: Put the cash in an insured online savings account. With so little time before you need the money, you can’t afford big losses should your quest for a higher return misfire.) Here are my thoughts on a few other issues to consider as Trump’s agenda takes shape.

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First, interest rates. Kiplinger’s official forecast calls for the yield on 10-year Treasury bonds, recently 2.4%, to reach 3.0% by year-end. I think there’s a good chance that the yield on the benchmark bond won’t climb that high. The rise in yields that started last summer got an extra charge after Election Day as investors concluded that an all-Republican government would deliver tax cuts and a massive infrastructure spending program that would goose growth . . . and inflation. I wouldn’t count on legislation emerging quickly or on a spending program being as large as some expect it to be.

Fed restraint. As for short-term rates, the Fed has said it expects to hike them three times in 2017. Even if it does, I don’t expect long-term rates to rise sharply. So hang on to your bonds, Ginnie Mae funds and real estate investment trusts that own mortgages.

Turning to stocks, the same expec­tations that resulted in higher bond yields have also pushed up share prices since Election Day. Shares of firms involved in construction and heavy industry, such as Cummins (symbol CMI) and U.S. Steel (X), have been especially strong. The hope is that they will capitalize on Trump-sponsored mega-projects, such as massive highway and airport upgrades.

However, investor euphoria may collide with the real possibility that a deficit-constrained Congress may not appropriate gazillions for transportation and other projects. I’d watch for a rotation back to the same kinds of high-yielding stocks that excelled in 2015 and 2016. I continue to favor AT&T (T, $42), which yields 4.7%. I’d also stay with property-owning REITs. Real estate companies are growth stocks that offer a potent hedge against inflation. A good way to own REITs is with Schwab U.S. REIT (SCHH, $42), which yields 3.4% (prices and yields are as of February 28).

Financial markets have remained remarkably cool in the face of a seemingly endless stream of controversial actions from the new president. Investors are clearly less worried than headline writers. How long investors can remain so complacent is a mystery to me. But even in normal times it’s impossible to time the markets, so there’s no point in trying. Keep hugging those interest and dividend payments.