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Grab the Gravol® and Reach for Yield



High price-to-earnings multiples? Deteriorating earnings? No problem it seems. U.S. stocks are near all-time highs and Canadian stocks are making a heck of a comeback. If seesawing markets have had you reaching for Gravol® over the past six months with the fickle day-to-day movements in the market, it’s time to take a deep breath and think about the big picture.

Let’s try to filter out some of the noise and focus on one powerful thing moving equity markets: the aging population in the world’s developed nations. By 2060, according to the U.S. Department of Health and Human Services, there will be about 98 million people 65 and over, more than double the number set in 2013.

Considering the amount of the population that’s aging, the concept of reaching for yield simply cannot go away, as large swaths of the population will absolutely need yield in some shape or form for decades to come.

What happens when bond yields are yielding almost nothing, or worse? As yield starved investors become more desperate, they are forced to look to riskier avenues of investment. The irony is that as investors get older they are meant to reduce exposure to stocks and increase exposure to fixed income for principal protection. No longer is this possible.

’Low-vol’ yielding equities are not exactly low volatility or value propositions anymore since they have become bond replacement plays in portfolios. Yes, you have principal risk in equities, but investors seem to be willing to forego the luxury of principal protection for what they absolutely must have – any reasonable yield they can find.

In this stampede for yield, what many investors have yet to clue into are the advantages of a covered call strategy, whereby an investor can earn income from writing calls on their underlying equity assets. While an investor does cap their upside with this strategy, it could provide the income they are looking for, and it lowers the sways of being directly invested in equity. It also takes advantage of the prevailing higher levels of worry and uncertainty that markets have been subjected to since last summer. It’s always important to remember that as we age and in turn hunt for yield, there are options to traditional approaches to fixed income and equity investing, pun intended.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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