I Bond Yields Have Tumbled: Buy These Bonds Instead

You and I, my fellow contrarian, are sufficiently old to recollect when “I bonds”—US financial savings bonds designed to guard you from inflation—yielded 9.62%.

It was Could 2022. Simply 14 months in the past!

Ah, the great ol’ days. Since then, Sequence I financial savings bond charges have tumbled to 4.3%.

Many readers wrote in with I bond questions earlier this yr. The financial savings autos boasted a nonetheless candy 6.89%. However that they had two main limitations:

• I bonds tie up our cash for a yr.
• We are able to solely make investments $15,000 in them yearly.

(The annual restrict is $10,000 per individual, plus an additional $5,000 per yr if utilizing a federal tax refund. These place sizes and liquidity restrictions prevented I bonds from being an enormous play for us.)

Having $15K tied up incomes 9.62% and even 6.89% is one factor. A awful four-point-three % is one other.

Ah, the issue with “quick period” autos like I bonds. It’s nice when charges are rising and our yields reset greater. However with inflation trending decrease, this dividend occasion is completed for now.

I bonds, our customer support workforce goes to overlook questions on you. For forty years we heard nothing, then a clamor, and now, quiet once more. I bonds, you had been the Mayfly of the investing world. Gone however not forgotten.

So, my I bond refugees, the place are we stashing our up-to-$15K that’s rolling off? After all, we’re not settling for 4.3% like vanilla buyers!

Heck no. We’re on to the following payer. This time, we’re going to lock in period (how lengthy till a bond matures). Let’s kick off our sneakers and keep some time.

What to purchase? Easy. The Federal Reserve is conserving charges excessive, for so long as they’ll—they advised us so final week. What Chairman Jay Powell didn’t say, no less than explicitly, is that they’re going to maintain charges excessive till we hit a recession.

Yeah, I do know. He’ll by no means admit he’s gunning for the “R” phrase. However he’s. Powell’s good state of affairs is the “comfortable touchdown” that cools demand and eventually takes inflation under his 2% goal.

Because the economic system ultimately slows down, rates of interest will drop. That’s bullish for “bond proxies” like utility shares. Excessive flyers like tech and AI shares will lose their luster. The investing playbook preached by our grandparents can be dusted off.

Utility dividends. That’s about as old style because it will get, and it’s precisely what we would like as this much-anticipated recession arrives!

These shares are prone to be the darlings of 2024. Which is why we’re loading up on them now.

Final week, we mentioned Dominion Power

D
(D), my favourite blue-chip utility inventory. D yields 5% in the present day. It hardly ever pays this a lot.

I bond buyers can’t solely get a pay elevate with D, however they’ll “lock in” a 5% yield for years to come back.

Need extra yield from the utility sector? Contemplate closed-end funds (CEFs). Whereas the mainstream media talks tech, we “second-level” buyers experience Reaves Utility Earnings (UTG).

UTG focuses on conventional utilities like Duke Power
DUK
(DUK) and Southern Co (SO). (Surprisingly, no Dominion! Which is ok—we’ll assist ourselves.)

The fund regularly trades at premiums to its NAV, in recent times as excessive as 13%! However as I write, UTG trades at NAV, which is about as “low cost” because it ever will get.

UTG pays a candy month-to-month dividend, which provides as much as an elite 8.2% per yr. Plus the occasional payout elevate, too.

Supply: Earnings Calendar

Brett Owens is chief funding strategist for Contrarian Outlook. For extra nice earnings concepts, get your free copy his newest particular report: Your Early Retirement Portfolio: Big Dividends—Each Month—Ceaselessly.

Disclosure: none