The Hunt for Yield Amid Falling Rates

The Federal Reserve's decision to hike interest rates from 2022 to 2024 to fight inflation brought with it a silver lining: higher rates on cash accounts and better yields from bonds. As a result, investors have been sitting on a mountain of cash—to the tune of $6.9 trillion as of January 2025.¹

However, the Fed's recent rate cuts potentially mark the end of this period during which yields reached their highest levels in years. "The days of 5%-plus interest rates from savings accounts are likely behind us," says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. "Now, yield seekers are wondering where to turn if rates drop even further."

At the same time, the Fed's shift in interest rate policy ushers in a degree of economic uncertainty. Lowering rates could boost economic growth by stimulating borrowing and spending, but it could also reignite inflationary pressures if demand rebounds too powerfully. Additionally, shifting rates might introduce volatility in both bond and equity markets, as investors anticipate future policy changes and adapt their strategies.

Here, Kathy and four of her colleagues identify the most practical choices in both fixed income and equities—along with several that should be approached with caution.

Rate volatility may make investors nervous (see "Managing interest rate risk"), but bond yields are still almost the highest we've seen over the past 15 years. "If you've got extra cash sitting in a high-yielding savings account, there may be alternatives that offer higher fixed yields, albeit with added risk," says Collin Martin, CFA^®, a director and fixed income strategist at the Schwab Center for Financial Research. Among the timeliest:

As of mid-December, investment-grade corporate bonds rated AAA to BBB offered average yields of 4.5% to 5.5%, depending on the credit rating and the time to maturity.² "For investors with long investing horizons, there's a lot of appeal in locking up those kinds of yields for five to 10 years," Collin says. "These are highly rated companies, so the risk of default in the event of a downturn is much lower."

Treasury Inflation-Protected Securities—bonds issued by the U.S. Treasury—adjust their principal value up or down based on inflation (as measured by the Consumer Price Index). Inflation has dropped significantly from its near-term peak in 2022, but it's proved sticky in recent months, suggesting a bumpy ride back toward the Fed's 2% target.

Meanwhile, proposed policies by President Trump—like immigration changes, tariffs, and tax cuts—could cause inflation to tick back up. "TIPS yields of 2% or more remain at the high end of their 15-year range," Collin says. "That might not seem appealing relative to other options, but the annual rate of inflation over the life of a TIPS could positively influence its principal value, potentially resulting in higher annualized returns if held to maturity."

Tax-free munis may appeal to those in the upper tax brackets or inhabit high-income-tax states like California and New York. Indeed, some munis are paying a tax-equivalent yield—the amount a taxable bond would need to yield to equal its tax-exempt counterpart—of 4.5% to 7.5%.³

"Most state and local governments have strong finances and stable revenues, meaning many are well equipped to weather any upcoming economic turbulence," says Cooper Howard, CFA^®, a director and fixed income strategist at the Schwab Center for Financial Research.

While high-yield bonds and private credit can offer similarly alluring payouts, both warrant extra caution:

Issued by companies with credit ratings below BBB–, these so-called junk bonds have historically offered hefty yields to account for their substantial risk. "The problem is that they currently aren't yielding much more than investment-grade bonds," Collin says. "They can make sense in moderation for investors with long time horizons; however, I'd proceed with caution—especially with those rated CCC or below."

This asset class, which allows investors to purchase private company debt originated by financial institutions other than banks, has nearly doubled in size since 2019, in part because of its outperformance in rising-rate environments. However, such investments often require long lockup periods and offer very little transparency into their holdings or valuation—significant issues now that falling interest rates have eaten into private credit's profits and it's defaulting at rates between 3% and 5%.⁴

"If there's anything we learned from the financial crisis, it's the value of liquidity," Kathy says. "If you're going to invest in private credit, make sure you can afford a potential loss."

Talk with your financial consultant or wealth advisor to learn more about high-yield bonds and private credit, and whether they could make sense for your portfolio and situation.

Stocks have historically performed well following the start of a rate-cutting cycle: Since 1929, the S&P 500^® Index has generated a positive return 86% of the time in the 12 months after an initial rate cut. However, much depends on the unique economic circumstances to which the Fed is responding. Here are four income-generating equities well positioned to withstand uncertainty.

"This is an obvious place to look for yield, but a higher dividend isn't necessarily better. In fact, a stock with an annual dividend of more than 6% is often a red flag," says Adam Lynch, a senior quantitative analyst at Schwab Equity Ratings.

That's because a company's dividend yield is calculated by dividing its annual dividend by the current stock price, and so a higher yield could be the result of a floundering price. A good rule of thumb is to look for dividend stocks yielding at least as much as a 10-year Treasury (which was 4.66% as of mid-January).⁵ Also look out for:

• Current ratio: A company is going to pay its creditors first; as a result, one whose current ratio (current assets divided by current liabilities) is 2 or above is generally prepared to cover its short-term-debt obligations.
• Dividend growth: A history of consistently increasing dividends can indicate a healthy fiscal policy. "If your dividends aren't keeping pace with inflation, you're actually falling behind," Adam says.
• Payout ratio: Companies whose ratio of dividends to earnings is under 100% are looking to hold on to some of those earnings—perhaps to invest in growth—while those whose ratio exceeds 100% are paying out more than they're earning, which is generally unsustainable. The lower the ratio, the more likely the company can continue to deliver on its dividend.

Because changes in a stock's price will influence your total return—which considers both capital gains and dividends—you might want to look for dividend payers in sectors that historically have tended to be resilient when economic growth turns negative, including:

• Consumer staples: Makers of everyday household items tend to be relatively insensitive to economic activity, since consumers must buy their goods irrespective of the broader economy.
• Financials: Although falling interest rates tend to lower the rates at which banks are able to lend, they also tend to lower the interest banks must pay on customers' deposits. "What's more, consumers' balance sheets remain relatively healthy, so it would take a fairly deep recession to cause the sort of spike in bad loans that might significantly affect a bank's bottom line," Adam says.
• Utilities: As with consumer staples, electricity, gas, and other utilities are need-to-haves, not nice-to-haves. Utilities are also benefiting from surging data center demand as businesses and consumers alike clamor for artificial intelligence and other power-thirsty tech.

REITs—companies that finance, operate, or own income-producing real estate—pay out 90% of their annual taxable income as shareholder dividends.

"However, REITs are highly sensitive to fluctuations in the real estate market, which is why you want to find out as much as possible about the types of properties a REIT holds, where they're located, and what sorts of risks they're exposed to," Adam says. "Even in the case of a recession, some longer-term trends may continue to support or undercut certain property types."

Health care facilities, for example, stand to benefit from America's graying population, while properties in areas prone to drought, flooding, hurricanes, and wildfires face not only declining demand but also higher insurance costs—assuming insurance is even available. Likewise, housing shortages in many major U.S. metropolitan areas may bolster residential REITs, while commercial REITs may continue to struggle as employees resist a full-time return to the office.

These hybrid investments share characteristics with both bonds and stocks.

Like bonds, they often make fixed periodic payments (generally in the form of dividends) and their prices tend to rise when interest rates decline. What's more, they're higher in the payout hierarchy than common stock in the event of a dividend cut, payment default, or company liquidation (hence the term "preferred"). Like stocks, their share price fluctuates (though they're typically less volatile than common stock).

"Preferred shares can make sense for income-oriented investors, especially those in high tax brackets," Collin says. "But always consider their yields relative to investment-grade corporate bonds. In the event of default, traditional bondholders will be paid out before preferred shareholders, so make sure their yields compensate you for that added risk."

Master limited partnerships are publicly listed entities that must obtain 90% of their income from natural resource–related activities, such as gas and oil exploration. Individual investors become limited partners in such investments, providing capital in return for regular cash distributions from the entity's operations.

MLPs tend to generate higher yields than bonds and stocks partly because of their status as pass-through entities, which distribute most of their cash to investors in the form of dividends. However, they typically pass on taxation to investors, as well. Investors must file a Schedule K-1 ("Partner's Share of Income, Deductions, Credits, etc."), and some MLPs may generate unrelated business taxable income (UBTI)—that is, income not directly generated from their day-to-day operations—which is also taxable even if held in a tax-sheltered account, such as an IRA.

"Stable cash flows and special tax treatment historically have allowed MLPs to pay generous distributions," says Raani Varma, senior research analyst at the Schwab Center for Financial Research. "But MLPs can be quite volatile depending on how they're structured. Those with extremely high debt levels and relatively high commodity exposure, for example, could be more susceptible to price swings, so you'll need to be selective."

Due to their complexity, opting for an MLP fund with broad diversification may be a good entry point to this asset class. Plus, investing in MLPs via an exchange-traded fund (ETF) simplifies the tax process: MLP ETFs don't generate UBTI, and the ETF issuer, rather than the individual investor, is responsible for filing a K-1.

However you choose to generate income within your portfolio, be sure it aligns with your risk appetite and target asset allocation—particularly at a time when the economy is still finding its footing.

"It can be tempting to take on more risk to capture higher yields, but that's generally not a wise move," Kathy says, "especially when you can still get some pretty attractive payouts from relatively low-risk options."