Where to Find Yield in 2022

The SPDR S&P 500 exchange-traded fund (SPY) is on course to return nearly 30% this year, including dividends. The iShares Core U.S. Aggregate Bond ETF (AGG) has returned negative 2%. Treasuries have also had negative returns. And that's before the impact of inflation, which eats away at nominal yields.

"The 'bond king' himself, Bill Gross, has called bonds 'garbage,'" Andrew Bary writes in this weekend's cover story. "Jim Grant, a Barron’s alumnus and publisher of Grant’s Interest Rate Observer, has said that bonds offer “'return-free risk.'”

But there is still income to be found out there. It might just require investors to look beyond the traditional areas of the bond market they're used to looking at. That could include convertible securities and junk bonds, or parts of the equity market.

For the classic Treasuries, municipal bonds, and safest corporate bonds, a negative real return in 2022 is all but guaranteed. Yields hardly touch 3%, and inflation is running at 5% or more.

Here's Andrew's summary of the income investing landscape in 2022, in Barron's 10th-annual guide to income-producing areas of the stock and bond markets:

The bull case for bonds is that inflation will ebb and structural demand from pension funds, other institutional investors, and retirees will keep yields low and real rates negative for years.

Treasuries and most municipals yield 2% or less, while junk bonds yield an average of 5%, and debt-like preferred stock, 3% to 4%. Convertible securities, which are coming off a lackluster 2021, yield an average of 2% and offer some of the security of bonds and the upside of stocks.

High-yield pockets in the stock market include energy pipeline companies, with dividends as high as 9%, and telecommunications operators AT&T and Verizon Communications at 5% to 6%. (We’re using AT&T’s likely dividend after it combines its WarnerMedia business with Discovery.) Drugmakers offer yields around 3% to 4%, as do electric utilities and real estate investment trusts.

Laggard overseas stock markets are another source of yield, given that most big companies outside the U.S. tend to favor dividends over stock buybacks. For 2022, we have ranked 12 sectors of the stock and bond markets in order of their appeal.

Andrew ranks a dozen sectors of the stock and bond markets in order of their appeal for 2022. Energy pipelines, U.S. dividend stocks, and overseas dividend stocks top the list. Treasuries and municipal bonds bring up the rear.

For a hugely informative report on how to invest for income generation in 2022, read Andrew's cover story here.