Tuesday, October 26, 2021

The Future is Now

Ask The CFP® Practitioner

“Individual income can grow only as fast as productivity rises.”

~ Alex Berenson (born 1973), American writer

Question: How will my income portfolio be affected by rising interest rates?

Answer: When it comes to making predictions, I’ve learned that it’s best to plan for the occasional economic wildcard and look for trends rather than absolutes. Between 2008 and 2015 the United States experienced something known as ZIRP or the zero interest rate policy placing income investors in a predicament. The Federal Reserve has raised interest rates three times in 2017 and has raised them twice so far in 2018, with further increases expected before year-end. As we look down the economic road ahead, we see the distinct prospect of rising short-term interest rates with years upon years of rates at or near zero in the rearview mirror.

Income portfolios typically rely on a strategic mix of stocks, bonds and other investments to generate cash and may need to evolve in response to a changing interest rate environment. Let’s take a look at how these may be affected and influenced by rising rates.


When interest rates increase, bond values decrease. If rates for intermediate and long-term maturities continue to rise, bond prices will decline and yields will increase. It’s not all bad though. Even if the value of bonds may be expected to decrease, the interest paid will continue and cash flow will remain unchanged. As bonds mature, proceeds could be reinvested at higher yields, increasing incomes. If individual bond owners simply hold their bonds to maturity or call, they will receive the par value, barring default. Remember, bonds that have shorter-term maturities tend to be less sensitive to interest rate hikes.


Companies that pay shareholders moderate dividends are believed to have more stable cash flows than their non-dividend-paying counterparts, especially in times of moving interest rates. While small-cap companies generate excitement (i.e., volatility), dividend growers move steadily along in a more mature and predictable way. As we know, dividends are not guaranteed and must be authorized by the company’s board of directors. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.


Due to their relatively reliable dividend, real estate investment trusts (REITs) can be used for diversification in portfolios of income-oriented investors. Real estate companies could have the potential to earn reliable streams of income from long and stable tenant leases. In addition, REITs must distribute at least 90% of their taxable income to shareholders as dividends. REITs do have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REITs will fluctuate with the value of the underlying properties. The price at redemption may be more or less than the original price paid. Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Please consult a qualified tax professional regarding your particular situation.

The Future

Of course, there is no set course for the future – including interest rates – and that’s not necessarily a bad thing. The biggest tax bill in 30 years is now in effect, and companies are hoping for expansion, bonuses and raises. That’s why it’s important to have a plan and revisit it often and review your portfolio in light of all the changes that are taking place and discuss how they may affect your future earnings and cash flow.

Herd Mentality

The answer to your question about how rising interest rates may impact your portfolio income is “It depends.” The relationships between various investments and the income they provide depends on many factors. As far back as 2011, experts called for short-term interest rates to increase. The Wall Street whiz kids have been wrong before so it doesn’t always make sense to follow the herd. Because there will always be economic wildcards, a methodical approach keeps investors from overreacting based on fear and emotions. Know what you own, why you own it and how various economic events will likely affect your goals. Stay focused and invest accordingly.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events. The value of fixed income securities fluctuates and investors may receive more or less than their original investments if sold prior to maturity. Bonds are subject to price change and availability. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Asset allocation and diversification do not guarantee a profit nor protect against a loss.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S.”

This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/InvestmentInsights.

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