The consumer price index rose 2.2% (YoY) and hit a two-year high in December, narrowing the spread between it and the 10-year to less than 40 basis points.
Numerous news headlines have trumpeted major concerns about inflation, which has been at 40-year highs. But how should investors handle inflation as it pertains to their portfolios? At the Morningstar Investment Conference on Monday, Kevin Dreyer, co-CIO of Gabelli Funds, outlined some guidelines for investing in the age of inflation. Historic inflation Dreyer started by Read More
The paltry gains offered by high-grade bonds since the financial crisis have caused investors to look elsewhere.
The Problem with the New Bonds
In 2016, Vanguard closed its $31 billion Vanguard Dividend Growth Fund to new assets. The fund had doubled in size in just three years.
Similarly, the size of Vanguard’s REIT Index Fund has increased 10-fold since 2009. Equities with dividends have been the main benefactor of the exodus from bonds.
However, years of massive inflows into these funds has inflated their valuations. While the S&P 500 gained 233% since March 2009, the S&P Dividend Aristocrats Index has shot up 265%.
Research Affiliates found that dividend stocks are more expensive than they’ve been over 80% of the time in the last 40 years. Likewise, Morningstar found dividend stocks, measured by its Dividend Yield Focused Index, were overvalued by around 6%.
Buying these stocks at such lofty valuations means taking a big risk. A sharp decline in share prices would dwarf any income received from dividends.
At current levels, the risk-premia offered doesn’t suffice. The average yield on the S&P 500 and Dow Jones Industrial Average is 2.38% and 2.75%, respectively. By simply investing in 10-year Treasuries, you can earn similar returns.
And there’s another problem with dividends today.
Since 2013, S&P 500 companies (excluding financials) have been paying out more cash than they generate. In the long run, this is unsustainable and could result in future cuts to pay outs—erasing the main reason for owning them.
With traditional sources of yield offering meager returns, where’s an investor to turn?
Prospering with Peer-to-Peer Lending
A new asset class that offers investors market-beating returns is Peer-to-Peer (P2P) Lending. The P2P sector has grown rapidly in recent years and is an excellent new source of fixed income.
In 2016, P2P investors earned net annualized returns north of 7%. Even those who took the most conservative approach saw returns of 5%. That’s more than double the average S&P 500 yield.
It’s worth noting that these returns are from 36-month loans. In terms of duration and return, that’s a much better deal than getting 3% on a 30-year Treasury.
In today’s low-yield climate, institutional investors are also getting onboard. Although the industry started out as peer-to-peer, the likes of Citibank and Morgan Stanley now fund around two-thirds of P2P loans.
Excited about the sector’s future, Goldman Sachs just launched its own P2P platform, Marcus.
While the headline returns may be enough to entice you, there is much more to learn about P2P lending. If you want to take a deep dive into the industry’s inner-workings and learn how to get started, you can download our free report, Welcome to the Bank of You.
This report gives you detailed analysis of the best P2P platforms and strategies for successful investing. And we show you a tool that consistently delivers net annualized returns of over 14%. That’s over 5.5 times the yield on the 10-year Treasury.
If you want your wealth to grow in a time of rising inflation, you have to put your money to work. With bond yields still near all-time lows—and dividend stocks not offering a much better deal—P2P lending is a great alternative for astute investors.
Free Report Reveals: How to Join the P2P Lending Revolution and Earn Yields of as Much as 10.39%
The P2P lending technology is turning the traditional banking industry upside down. With almost no effort and risk, you can join the revolution in minutes and earn market-beating yields on high-grade P2P loans. Grab our free report, Welcome to the Bank of You, and learn everything you should know about P2P lending to get started. Click here to download.
Article by By Stephen McBride, Garret/Galland