Income outlook 2023: Investors' ships may come in

A unique combination of factors may make the new year bright for income investors.

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Key takeaways

  • Investing in a wide variety of assets may help investors meet their needs for income as higher interest rates and a potential economic slowdown help some types of investments while hurting others.
  • Dividend-paying stocks of oil tanker operators, convertible and investment-grade corporate bonds and preferred stocks are among the investments that may offer opportunities in 2023.
  • In exchange for higher income, some assets may experience more volatility than traditional income investments.
  • Professional investment managers have the research resources and investment expertise necessary to identify opportunities and manage the risks associated with higher-yielding security types.

In 2022, the Federal Reserve began sharply raising the federal funds rate which hurt both stock and bond prices. Looking to 2023, those higher rates and the resulting lower prices of many assets may make the new year bright for income-oriented investors. High-quality assets have been costing less and yielding more. Income-producing assets ranging from familiar certificates of deposit to dividend-paying stocks of oil tanker companies have offered opportunities for income seekers who've had limited choices over the past 15 years of super-low interest rates and yields.

Adam Kramer, manager of Fidelity® Multi-Asset Income Fund (FMSDX) looks for high-quality assets whose prices have been temporarily pushed down by investors overreacting to uncertainty about the interest rates, economic growth, or other factors unrelated to the ability of the assets to deliver yield to the investor who holds them. "We're investing in different asset classes that are not in traditional benchmarks."

A good example are the stocks of companies that own and operate the fleets of tankers that move the world's energy between oil fields, refineries, and consumers. "Tankers are up 80% to 90% in the last 12 months and you're likely to get a lot of income from these companies," says Kramer. "For years, there’s been very little spending for new ships, but since Russia invaded Ukraine, all the routes for shipping crude oil and refined oil products around the world have changed and most are now much longer distances. Instead of oil going from Russia to Europe, now it needs to get hauled to Europe from the Gulf of Mexico or Brazil. These longer routes mean higher prices for oil and much more demand for ships to carry it."

Kramer sees a continuing opportunity for investors in tanker stocks because many of these companies paid out nearly all their income in dividends. "Those dividends are in the single digits now, but it's very possible they will go much higher, so I like them a lot," he says. "Looking ahead, there are few new ships being built so the tanker companies can keep the rates they charge to haul oil high. Because of what's happening with Russia, new routes are being permanently created. There might be volatility, but many of these companies have very strong management teams and they know how to lock these high rates in place for the next 1 to 2 years."

Tankers are only one example of where skilled managers can find income in 2023. "Having the ability to invest in a wide variety of assets lets you better balance the income you get from bonds and dividends against the amount of risk you're taking to earn that income," he says.”

Opportunities in corporate bonds and preferred stocks

Besides oil tankers, Kramer sees investment-grade corporate and convertible bonds, and preferred stocks as offering the best balance between risk and reward at the start of 2023. "The key is to find investments that pay a high enough level of current income to offset the possibility that their prices could go down in the short term." Fortunately, rising interest rates have made that easier. As rates rise, yields on many investments that have historically had lower risks than stocks may also rise to the point where their potential total return becomes comparable to that of stocks but with less potential volatility.

Kramer points to investment-grade corporate bonds as examples of this phenomenon where opportunities are available without excessive risk. He says, "I feel like you're getting a bigger bang for your buck in investment-grade bonds than stocks of the same companies. If earnings stay steady, prices of both bonds and stocks can recover, but if earnings decline, bond prices are likely to be less volatile than stock prices. Investment-grade bonds also present relatively little credit risk. Even if the economy gets worse, you could still earn income, with lower volatility than stocks. In some cases, you can get 5% to 6% on some shorter-dated investment-grade corporates of blue chip companies and closer to 7% on longer-dated bonds from those companies," he says.

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Preferred stocks issued by big banks and utilities also offer an attractive alternative to common stocks of these same companies. These are investment-rated assets that offer income and potential capital appreciation regardless of what happens to the underlying common stocks. They are also currently paying yields up to 3 times that of those stocks. "The investment-grade fixed-to-floating preferred stocks have a wider spread and premium yield than the senior bonds issued by the same companies," says Kramer. Despite these advantages, they have sold off along with most other asset classes as investors worried first about how higher interest rates would affect them and then about how a recession could affect the financial health of the issuers. However, those sellers may have overlooked the fact that many preferred stocks are actually well suited to a rising-rate environment because the yields they pay rise along with rates.

Opportunities in convertible bonds

Because rising rates often increase the volatility of stocks, they are also helping create opportunities in convertible bonds. Convertibles not only pay interest, they also reduce some of the potential drawbacks of both stocks and longer-duration bonds. Convertible bonds generally are less sensitive than high-yield or other bonds to the risk higher interest rates may pose. Convertible prices can fall if interest rates rise and stock prices decline, but they are less sensitive to such changes than both stocks and traditional corporate bonds.

“More than 50% of the convertible bonds in the market are trading more like bonds and may be less volatile than stocks," says Kramer. "Now, some of the most equity-sensitive of those bonds are being converted to stock and coming out of the market which may make convertible bonds even more attractive overall."

But remember that the convertible bond market is both small and specialized, and conditions in it can change quickly. This is because unlike other asset markets, the makeup of the convertible market is constantly changing as existing bonds get converted to stock and leave the market while new bonds with different features take their place.

Finding ideas

Investors interested in multi-asset income strategies should research professionally managed mutual funds or separately managed accounts. You can run screens using the Mutual Fund Evaluator on Fidelity.com. Below are the results of some illustrative mutual fund screens (these are not recommendations of Adam Kramer or Fidelity).

Multi-asset class income funds

Fidelity funds

  • Fidelity® Multi-Asset Income Fund ()

Non-Fidelity funds

  • BlackRock Multi-Asset Income Portfolio ()
  • Invesco Multi-Asset Income Fund ()

Separately managed accounts

  • BlackRock Diversified Income Portfolio

The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

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