In light of the current higher interest rate environment, investors now have the opportunity to develop yield-seeking strategies without taking on excessive risk or settling for meager income streams. The rise in discount rates has led to lower multiples across the board, making yield levels more appealing. This shift has affected both high-risk and defensive assets, creating opportunities to invest in companies with strong capital structures and growing cash flows that offer higher dividend yields due to the increased discount rate.
While overall yield levels have increased, investors must decide whether to prioritize maximizing yield potential or sacrificing some current income for potential dividend growth. Diversification is important in this context, across assets, sectors, and strategies. Two specific instruments that cater to high yield-seeking investors by offering different risk and return dynamics are worth considering.
The first pick is the Schwab U.S. Dividend Equity ETF (SCHD), a popular dividend growth ETF with a focus on well-established businesses with low financial risk and significant dividend growth potential. The combination of defensive exposure and clear dividend growth potential makes SCHD an attractive option for dividend investors.
The second pick is the NEOS NASDAQ-100 High Income ETF (QQQI), a relatively new ETF that utilizes a dynamic option strategy, including a covered call strategy, to generate high current income streams. While the yield is attractive at roughly 14% on a forward annualized basis, the upside potential is limited due to the option strategy. However, the potential for price appreciation in the underlying securities adds another dimension to the investment.
In conclusion, despite the current environment offering a wide range of companies with decent yields and limited risk, diversifying into growth-focused instruments can still be beneficial. With higher interest rates, investing in growth-oriented instruments does not necessarily mean sacrificing yield. SCHD and QQQI serve as examples of how investors can access growth potential while still enjoying attractive current income streams.