LOOKING AHEAD: Outlook on attractive yields for 2026

Key Concepts

• Yield Seeking in 2026: The primary focus is identifying investment opportunities offering attractive yields in a lower-yield environment.
• Bond Yields: Current yields for various bond types (Treasuries, Munis, Mortgage Securities, Preferred Stock, Junk Bonds).
• Dividend Yields: Yields from stocks, focusing on sectors like Pipelines, REITs, Consumer Staples, and Utilities.
• Pass-Through Businesses: MLPs and REITs that distribute income directly to investors as dividends.
• Dividend Aristocrats: Companies with a 25+ year history of increasing annual dividends.
• Business Development Companies (BDCs): Companies investing in private credit, offering higher but riskier yields.
• AI & Utilities: The impact of Artificial Intelligence and data centers on the utility sector’s growth potential.

Bond Market Outlook & Yields

The bond market experienced gains in the previous year due to falling interest rates, resulting in both coupon payments and price appreciation. However, the current outlook suggests a shift, with yields now at a lower starting point. The expectation is that investors will primarily earn the coupon rate (interest) this year, with limited potential for price gains. Specific bond yields discussed include:

• Treasuries: Approximately 4%
• Munis (Municipal Bonds): 3-5%
• Mortgage Securities: 5%
• Preferred Stock: 6%
• Junk Bonds: Around 7% (considered “good, not great”)
• 30-Year Treasuries: Almost 5% yield.

The speaker suggests considering Treasury bonds and preferred stock as reasonable options, while cautioning about the attractiveness of Munis except at the longer end of the market. Business Development Companies (BDCs) are presented as a higher-risk, higher-reward option, offering yields exceeding 10% through investments in private credit.

Equity Opportunities: Sector Analysis & Specific Stocks

The discussion highlights several equity sectors offering potentially attractive yields:

1. Pipelines: Yields average around 5%, with potential for 5% dividend growth, translating to a possible 10% total return. Specific companies mentioned: * Kinder Morgan: ~4% yield * Energy Transfer (Partnership): ~8% yield * Williams: ~3% yield

2. Real Estate Investment Trusts (REITs): Despite being the worst-performing sector in the S&P 500 last year (low single-digit returns), REITs are seen as offering a combination of yield and earnings growth. * Average REIT Yield: 4% * Dividend Growth: 5% * Equity Residential: Focus on apartments. * SL Green: New York’s largest commercial landlord, facing concerns regarding New York City’s business climate under the current mayor.

3. Consumer Staples: Currently out of favor, offering yields of 3-5%. * Pepsi & Coke: ~3% yield * Colgate & Proctor & Gamble: ~3% yield * Campbell Soup: Close to 5% yield * Craft: Closer to 7% yield (very out of favor)

4. Utilities: Benefiting from the increased power demands of data centers driven by AI, with potential for high single-digit earnings growth. * XLU (ETF): ~3% yield * Duke Power: * Dominion: ~4.5% dividend yield

Investment Funds (ETFs)

For investors seeking diversified dividend exposure through funds, two ETFs were recommended:

• Schwab CHD: ~4% yield (lagged the market in 2025)
• NOL (Dividend Aristocrats): ~2% yield (companies with 25+ years of annual dividend increases)

Turnaround Potential & Valuations

The discussion emphasizes the potential for turnaround stories, particularly in the REIT sector. Valuations in the public REIT market are currently below those in the private market, creating opportunities for private real estate operators to acquire public companies, as seen with Alexander and Baldwin.

Economic Outlook & Rate Cuts

The speaker expresses uncertainty regarding the number of rate cuts expected in the current year, suggesting the possibility of no cuts or a maximum of one.

Notable Quotes

• “I think this is a year where you’ll probably earn the coupon, meaning you’ll earn the interest rate on the bond and not get much.” – Andrew Barry, regarding bond market expectations.
• “You could see deals for public companies by private real estate operators like you saw for company Alexander and Baldwin recently.” – Andrew Barry, on potential REIT acquisitions.
• “Utilities have become an AI play because of all the power that’s needed uh for the data centers and uh suddenly the uh sector has got a better earnings out there than ever did before.” – Andrew Barry, on the impact of AI on the utility sector.

Logical Connections

The conversation flows logically from a broad overview of the yield environment to specific asset classes and sectors. It progresses from bonds to stocks, then to funds, and finally touches on the broader economic outlook. The discussion consistently links yield potential with risk assessment and growth prospects.

Synthesis/Conclusion

The key takeaway is that finding attractive yields in the current market requires a diversified approach and a willingness to explore various asset classes. While bonds offer stable income, their potential for capital appreciation is limited. Equity sectors like Pipelines, REITs, Consumer Staples, and Utilities present opportunities for higher yields, but each comes with its own set of risks and considerations. Investors should carefully evaluate their risk tolerance and investment goals when selecting yield-generating investments. The outlook for rate cuts remains uncertain, adding another layer of complexity to the investment landscape.