Follow the money

Investors seeking income today should look for opportunities where balance sheets are strong; namely, with corporations.
Cash-rich companies are in a position to meet their debt requirements for their bondholders and still pay and grow dividends.
By looking across the corporate capital structure, investors can choose to invest in how corporations finance their activities with varying levels of risk and reward.

It’s no secret that corporations have emerged from the recent financial crisis with significant amounts of cash on their balance sheets. And savvy investors have started to catch on to the prospect of consistent dividends and attractive bond yields corporations may offer. Tap into these strong balance sheets by following the money and investing across the corporate capital structure to get the income you need.

Where are today’s income opportunities?

Let’s be clear, most income opportunities today are not found on government balance sheets, which remain weak as governments continue to add to already high debt levels. But corporate balance sheets are strong and company cash levels are elevated. Cash-rich companies are in a position to meet their debt requirements for their bondholders and still pay and grow dividends.

Accessing corporate income opportunities

One way to tap into the different types of income available is by looking at the corporate capital structure. The capital structure offers several opportunities to invest in how corporations finance their activities.

Generally speaking, there are three types of securities that a corporation may issue to provide financing: debt, equity, and hybrid investments. Within each broad security type, there are often multiple subtypes. The chart below breaks down the different subtypes, based on the order in which a company would repay these obligations in the event of a bankruptcy or liquidation.

Capital structure

Each part of the capital structure has its own risks and rewards. As you move up in the capital structure, your likelihood of repayment increases. Because of that, the price volatility of those investments will generally be lower in most cases than the price volatility of securities that are lower in the capital structure. On the other hand, investments in the lower parts of the capital structure like common stock may have the greatest potential for upside gains.

Rely on in-depth research to uncover opportunity

The risks and rewards may vary quite dramatically for different types of companies. For instance, repayment risks and levels of income may differ significantly between securities issued by high-quality companies with strong balance sheets that are deemed ‘investment-grade’ and those issued by more highly leveraged companies. Finally, market dynamics can change the relative risk/reward characteristics of different security types and different types of companies, providing opportunities for dynamic investment approaches. In-depth research is necessary to uncover the best opportunities and to tailor a portfolio that can meet the need for more stable and predictable returns.

Take a new approach to income investing

The bottom line: A new approach is needed to help investors get the income they need. Historically low fixed-income yields continue to weigh on the current investment landscape; however, we believe that cash-rich companies offer an attractive opportunity. Investors can access their strong balance sheets by investing across the full spectrum of the capital structure. Floating rate loans, corporate bonds, convertible securities and dividend-paying stocks each offer unique advantages to help deliver the income you need. To learn more, explore the resources below and return to this blog for ongoing insights into the financial markets, global and economic issues and investor needs and trends.

White paper: Floating rate – Hedging the interest rate risk in your fixed-income portfolio

Video: Income opportunities

Website: Redefining income

See more Market Insights from Columbia Management.