Alternatives for Income Investors in the Year Ahead

Alternatives for income investors in the year ahead include dividend-paying equities, money market accounts and more.

The best alternatives for income investors in the year ahead are affected by key factors such as U.S. government interest rate policies, economic growth, corporate earnings, whether the Fed will begin cutting rates in 2024 and political risk. Even though it appears the Fed is finished or nearly done with raising the short-term rates it controls, much uncertainty remains for income investors.

Absent a significant decline in the U.S. economy, the Fed may not cut interest rates for months while inflation remains elevated. However, investor optimism for the Fed to cut rates could be fulfilled in 2024 if the inflation rates keeps trending down as occurred by dipping to 3.24% in October for the previous 12 months, following 3.70% for the past 12 months in September and 7.75% for the same amount of time ending in October 2022.

Alternatives for Income Investors: Recession-Resistant Dividend Payers 

Dividend investors must be cautious about the effects of higher interest rates and slower economic growth on corporate profits and cash flow, cautioned Bob Carlson, a pension fund chairman who heads the Retirement Watch investment newsletter. It is “critical” that investors select dividend-paying companies that can can maintain or increase their payouts during an economic slowdown, he added.

“The best trade off between risk and reward now is in money market funds and other short-term, principal-protected investments,” Carlson continued. “Longer-term bonds and other risky investments face several headwinds in the first half of 2024.”

Bob Carlson, head of the Retirement Watch, gives an interview to Paul Dykewicz.

The Fed doesn’t want to return to 0% interest rates if it can avoid that, Carlson told me. Yet, markets are pricing in significant reductions in short-term rates, he counseled.

“More importantly, longer-term rates are lower than short-term rates,” Carlson said. “Most of the time, short-term rates are lower than longer-term rates. The current anomaly has to be corrected by either reductions in short-term rates or increases in longer-term rates. I expect longer-term rates to increase from current levels, which should hurt prices of bonds and other income-oriented investments in 2024.”

Alternatives for Income Investors: Money Market Accounts

Top money market rates are now above 5%. Income investors currently can avoid market risk by using money market accounts and certificates of deposit, Carlson recently wrote to his Retirement Watch subscribers.

Another seasoned market and interest rate watcher is Jim Woods, who leads the Successful Investing newsletter and a variety of trading services. Woods has identified “three pillars” of the current market rally, featuring a soft economic landing, reduced inflation and the Fed stopping its rate hikes.

In the November issue of Successful Investing, Woods advised another key factor going forward will be stable earnings. For bullish sentiment to prevail, all the positive expectations need to happen, he added.

Woods also used the term “immaculate disinflation” to convey the idea that prices will fall quickly and growth will not slow. This is different from the more negative consensus view that inflation gradually declines in 2024, he added.

“Instead, immaculate disinflation means inflation falls quickly by itself and that economic growth stays resilient,” Woods advised his Successful Investing subscribers.

Seasoned stock picker Jim Woods heads Successful Investing.

“This makes sense because it’s possible all the inflation of the past two years was supply chain driven and now that supply chains are mostly working again, all that inflation will reverse itself and we’ll go back to a 2019 type of inflation,” Woods opined.

Alternatives for Income Investors: High-Yield Investments

Another way to reap the rewards of high income is to let someone who has a knack for picking winners take the lead. That is the role that Bryan Perry, head of the Cash Machine investment newsletter, tries to fill. His Cash Machine portfolio recommendations have an average dividend yield of 11.14%.

Positive news for the market lately has included robust earnings from key big-cap tech companies, as well as Black Friday and Cyber Monday promotions leading to record sales, Perry wrote to his subscribers. What became clear amid the rally during November is that market sentiment pivoted hard with the softened inflation and the view the Fed’s rate-raising has been accomplished, he added.

Recent data implied Fed rate cuts would come as early as spring 2024 when measured by the Treasury futures market. It is not just Perry’s opinion, since the CME FedWatch Tool on Nov. 30 showed a 46% probability of a quarter-point rate cut in March 2024 versus just an 11% probability one month earlier.

“This shift in investor mentality has provided a sustainable catalyst as underinvested professional fund managers raised equity weightings, insiders bought shares in the open market and corporations accelerated their stock repurchase programs,” Perry commented. “The combined inertia has taken the major averages back up to the previous 2023 highs last seen in late July.”

Bryan Perry’s Cash Machine averages an 11.14% dividend yield.

Alternatives for Income Investors: Beware of Rising Political Risk

Roughly 140 hostages taken from Israel by Hamas militants on Oct. 7 remain captive in Gaza, after a weeklong truce that led to the release of many women and children. The majority of the hostages held in Gaza by Hamas and other Palestinian groups are men, including some Israeli soldiers.

Both sides accused each other of violating the ceasefire, causing the exchange of hostages taken from Israeli for Hamas detainees to end. No more prisoners will be exchanged with Israel until there is a ceasefire, and all Palestinian detainees also are released, a Hamas leader told pan-Arab Al Jazeera TV.

Meanwhile, winter conditions are descending in war-torn Ukraine. Continuation of the protracted invasion by Russian forces of its neighboring nation seems destined well into 2024 and possibly beyond.

Russia’s attack of Ukraine began on February 24, 2022, and has caused massive deaths and injuries on both sides. Russia’s President Putin seems willing to inflict a devastating humanitarian toll on Ukraine’s civilian population with direct military assaults on communities that are no where near battlelines.

Such brutality has drawn international condemnation from many countries, as well as the United Nations (UN). Continued evidence of war crimes and human rights violations committed by Russian authorities in Ukraine, including torture, rape and the deportation of children, was documented in a UN report released on October 20, 2023. That update follows a year after the the United Nations General Assembly voted in October 2022 to condemn Russia’s “attempted illegal annexation” of four Ukrainian territories, with 143 countries in favor, only five opposed and 35 abstaining.

U.S. government resolve to oppose Russia’s aggression resurfaced this week from an American diplomat who said that restrictions aimed at curbing Moscow’s energy revenue will continue in the years ahead. The goal will be to halve Russia’s energy revenue by 2030 to limit Russia’s financial resources to fund future military action.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is a great holiday gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.