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Take Advantage of Rising Interest Rates: 3 Solid Income Plays!

Take Advantage of Rising Interest Rates: 3 Solid Income Plays!



The Bad News:  Interest Rates are Rising

Rising interest rates will translate into solid income plays.  With the economy rebounding from COVID and attempting to return to full throttle in the past year or so, we saw the market overheating in many respects.  There was a lot of speculation driving company valuations, and many solid well-performing companies found themselves being overvalued.  Consumer demand spiked, gas & oil prices were super high, and inflation began creeping in!

To stave off inflation in the U.S., the Federal Reserve began hiking baseline interest rates. The Fed Fund Rate has been gradually increasing. It's the rate the Fed charges to banks and lenders before they, in turn, lend to consumers.  The current Federal Reserve interest rate is 3.75% to 4.00% as of Nov 2022, versus only 0.25% a year ago. It marks the fourth consecutive rate hike of 0.75% and the sixth rate hike this year.  The highest fed funds rate ever was 20% in 1980 in response to double-digit inflation that took root back then. The lowest fed funds rate was zero in 2008 at the onset of the Great Recession, and again in March 2020 in response to the COVID pandemic.

The bad news is that rising interest rates mean it costs more to borrow, affecting everything from credit cards to home mortgages.  This is true for new debts as well as for folks with existing financial debts that carry adjustable rates.  Payments on debts are now higher because the amount of interest tacked on with each payment is now higher.

The Good News - Income Plays!

Inflation is starting to slow.  With its current strategy of interest rate hikes, and assuming the economy doesn't suffer from any unexpected major shocks, the Fed has projected inflation to decline to around 3.1% in 2023 and 2.3% in 2024.  This is close to the central bank's target of a stable 2% inflation rate.

The more good news is that rising interest rates have also driven increases in interest-oriented investments. Investments such as savings accounts, certificates of deposit (CDs), REITs, and bonds now have higher rates. Investors can lock those higher rates in now for additional passive income!  While it's good that interest rates appear to be on the decline at this point, investors should view the recent hikes as opportunity and take advantage of higher rates that have trickled into fixed-income investments. Take advantage of rising interest rates with solid income plays to aid wealth creation.

Lock in Higher Rates!

None of us can predict the future.  But assuming that rates are indeed heading down, and considering that they haven't been this high in well over 15 years, the potential is there to lock in any fixed income plays with higher rates.  Now may be the time to buy income, locking in dividends or interest for years or decades to come.  

A view of current yield quotes as of November 24, 2022, is shown below in the chart from Fidelity Investments.  Yield levels vary commensurate with associated risk.  Relatively "risk-free" U.S. treasuries are considered the safest among bonds. Lower grade corporate bonds (from companies with lower credit ratings) are considered more risky.

Fixed Income and Bond Yields for income plays

3 Solid Income Plays

Cohen & Sterns Quality Income Realty Fund - RQI

Real estate investment trusts, also known as REITs, are companies that own or finance income-producing real estate across a range of property sectors.  The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.  Mortgage REITs don't own real estate, but they finance real estate instead, earning income from the interest on their investments.

REITs are currently out of favor with investors largely because of interest rates!  Because REITs tend to leverage investments with a lot of debt, rising interest rates is perceived as an increased risk for them by the market.  But looking at the portfolio of RQI, I see a strong list of investments, with its top 10 holdings making up nearly half of its portfolio (out of 224 total holdings).  And that top 10 list consists of quality, well-known REITs with little debt on their balance sheets.  Also, REITs are benefiting greatly from rising rates, since that essentially translates to higher rents and increased cash flow.

Dividend yields for 3 solid income plays

REITs are great income plays and RQI has a yield at nearly 8%.  As a whole, REITs have been generating excellent earnings recently and most REITs have recently raised earnings guidance going forward.  The goal is not to sell shares for a higher price than bought, but rather to buy, hold, and collect income.  But the potential for appreciation of shareholder value is also there.  Shares have been beaten down because of interest rates, but with much higher earnings, a revision is bound to occur in the near future.  In the meantime, by investing in RQI or a comparable REIT, you can enjoy collecting a very nice dividend!

PIMCO Dividend and Income Fund Class A - PQIZX

PIMCO is a very well-known and leading investment management firm.  Managed by a couple of veteran fund managers, Alfred Murata and Daniel Ivascyn, PIMCO's PQIZX is a no-transaction fee fund that has generated average +5% annual income over its life and +2.11% in the prior 3-year period.  It's got solid asset allocation, with the bulk of the fund being invested in domestic bonds ~67%.  It also has a complement of ~28% being invested in domestic stocks.  The overall portfolio diversification reflects lower risk, with the majority of the allocation to bonds being invested in government-related bonds such as treasuries and Fannie Mae underwrites, as well as corporate bond holdings in blue-chips like J&J and Pfizer.  

Portfolio Diversification

PIMCO has shown great strategic ability. It was snatching up mortgage-related securities when other institutions were selling them at steep discounts, a wise move that benefited investors for years following The Great Recession of 2008.  Clearly, the real estate market would rebound eventually, and PIMCO leveraged buying opportunities when others were running for the exits. When prices are low, buyers stand to benefit by seizing the opportunity! As a result, PQIZX has outperformed many other dividend and income funds. Hypothetically, a $10K investment in the fund at its inception back in 2013 would now be worth more than $15K.  This from simply investing and holding, and letting the fund managers work on your behalf.

Hypothetical Growth of income plays


Similar to investing money directly into corporate stocks, I tend to prefer investing directly into corporate bonds as well.  Consistent with rising interest rates, we see several of the leading financial institutions pushing new bond offerings as income plays.  Bank of America has a new 2022 offering with a coupon rate of 5.7% paid semi-annually and a maturity date of Dec 2027.  The company has a Moody's rating of A2 and a S&P rating of A-, both grades reflecting a high-grade investment bond.  Generally, higher ratings are associated with more profitable companies that rely less on debt as a form of financing, are  more liquid, have stronger cash flows, and have no trouble servicing their debt in a prompt and timely fashion.

Bank of America is a "Mega-cap" company with a market capitalization of over $300Billion.  The company's stock has returned 250% over the last 10 years, and it has a dividend yield of 2.33%.  Along with a debt-to-equity (D/E) ratio of about 1.0, well below what I would consider to be a desirable level of below 1.5, I think its balance sheet is in pretty good shape.  Long-term debt levels for the company have also trended favorably over the last 10 years as well.  If interest rates continue to rise, the value of the bond itself would decline; however, it appears interest rates may go down with inflation starting to be contained.  In any event, why not lock in a 5.7% return with a company like Bank of America and see it through to maturity in 2027.  The focus in this case is income rather than any capital gains!


Reduce stress and find comfort in some solid, passive income-oriented investments, 3 of which are income plays highlighted above.  Individual bonds like the Bank of America 2022 issue offer certain advantages:  you know the interest rate you will earn and how much you will get back upon maturity.  They're typically less costly to purchase than mutual funds, which carry ongoing fees. Individual bonds also allow you more control over your fixed-income portfolio.  With a bond fund, however, you let a professional manager deal with issues such as portfolio management, credit research, and call options.

In any event, it's good to leverage these rising interest rates and complement your portfolio with some additional income!  Some concern may surround the ability for the bond to be called. But in the case of the funds, we let the fund managers re-allocate as they see fit.  With respect to a direct bond investment, a called bond also gives you the opportunity to reinvest the money at the prevailing rates, but I feel that's less of an issue in the current market environment.  So, naturally, there are pros and cons to investing in individual bonds or bond funds. You just have to decide what works best for you.


The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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