Hello, YieldAlley readers! In this issue:

• The Fed’s favorite inflation measure.

• BlackRock sees opportunities in the bond market.

• How to utilize DRIPs increases your returns.

• Federal land ownership.

• A free cash rate tracking spreadsheet.

• And more!

Fixed Income and Cash Income

The Fed’s Favorite Inflation Measure Cooled in April

The Federal Reserve's preferred measure of underlying US inflation cooled in April. The core personal consumption expenditures (PCE) price index, which excludes volatile food and energy components, increased by 0.2% from the previous month and 2.8% from a year ago. The value gap between this core gauge and the overall PCE index, which rose 0.3% monthly and 2.7% yearly, underscores the core PCE's effectiveness as a superior inflation measure. The unexpected 0.1% decline in inflation-adjusted consumer spending further supports the positive inflation outlook. The moderation in the core PCE index suggests a more manageable inflation trajectory, with many predicting that the Fed will cut rates at least once this year. As of April, central bankers are closely monitoring services inflation excluding housing and energy, which rose by 0.3%.

👀 Top BlackRock’s bond manager sees opportunity. BlackRock’s Rick Rieder, named Morningstar’s outstanding portfolio manager of 2023, is focusing on high-quality yields without taking significant risks, emphasizing the benefits of compounding returns and stability. Despite the potential for higher yields with riskier investments, Rieder cautions against chasing excessive returns due to expected market volatility and the upcoming election season. Bond yields have increased since the Federal Reserve began raising interest rates in 2022 and officials remain concerned about inflation, but Rieder predicts rate cuts could start as early as September. Rieder's top picks include AAA collateralized loan obligations, offering yields upwards of 6.5%, and high-quality investment-grade agency mortgages with short durations. He also finds European credit, both investment-grade and BB-rated high yield, attractive due to the strong US dollar. Rieder manages the BlackRock Flexible Income ETF (BINC), which has a 30-day SEC yield of 5.95% and a net expense ratio of 0.40%.

🏷️ Inflation may not return to the US central bank’s 2% target until mid-2027. According to Federal Reserve Bank of Cleveland research, pandemic-era shocks have resolved, but persistent intrinsic forces like wage growth and firms changing prices continue to keep inflation elevated, wrote Cleveland Fed economist Randal Verbrugge. Supply chain normalization contributed to recent inflation progress, but this effect has plateaued. The Cleveland Fed model indicates inflation's return to the target will rely on these intrinsic dynamics, potentially prolonging high interest rates. Fed officials, including John Williams and Christopher Waller, suggest cautious rate cuts may begin in late 2024 if inflation data improves.

All brokerage cash guides and playbooks can be found on YieldAlley.com.

Dividend Income

Dividend Reinvesting: An Understated Alternative (and Boost) to Capital Gains

Maybe you’re far from retirement, or you simply don’t need the dividend income today. By reinvesting dividends, you can generate future earning power that can be as effective as pursuing capital gains. 

A prime example of this strategy can be found in the company Realty Income, a California-based real estate investment trust that specializes in single-tenant retail properties. The company is devoted to large, consistent, and rising dividends, targeting “the 75-year-old lady in Dubuque for whom dividends aren’t a luxury, but a necessity”. Between the start of 1995 and 2007, Realty Income’s share price rose from $8.56 to $27.70, Buying 100 shares for $856 would result in a capital gain of $1,914, or an annualized return of 10.3%. During those same 12 years, Realty Income also paid out $13.57 per share in dividends. The same $856 investment generated $1,357 in dividends, in addition to the $1,914 in capital gains, for a total return of $3,271.

Here's the kicker though, and why dividend reinvestment can be so powerful. The shareholder who consistently reinvested those monthly dividends to acquire more shares of Realty Income would have increased their ownership from an initial 100 shares to 249 shares. By following the strategy of reinvesting dividends, the total return would be $6,039, almost double the return if you had taken out the dividends. By utilizing an automatic dividend reinvestment plan (DRIP), which is commonly offered by brokerage firms and sponsored by certain companies, you take advantage of the compounding effect of both capital gains and dividends.

How to take advantage of dividend reinvesting. You can maximize your investment returns through two main types of DRIPs: those offered by brokerage firms and those sponsored directly by public companies. Brokerage DRIPs offer automatic dividend reinvestment services for the stocks you hold within your brokerage account. This service is typically free of charge, allowing you to automatically reinvest your dividends into additional shares of the same stock without paying any commissions or fees. For example, popular brokerage firms like Charles Schwab and Fidelity provide these services. Company-sponsored DRIPs are offered by publicly traded companies to reinvest dividends automatically. For example, companies like Coca-Cola and Johnson & Johnson provide DRIPs, making it easy for shareholders to increase their holdings directly through the company. By enrolling in a company-sponsored DRIP, you benefit from the potential cost savings and the ease of accumulating more shares over time.

If you do not need the dividend income today, a dividend reinvesting strategy will not only increase your share count but also enhance your future earning potential with increased dividends. It’s a powerful strategy that’s often overlooked in pursuit of capital gains. With DRIPs, you create the ability to compound both future income potential and capital gains.

Opportunities

Brokerage Bonuses

Brokerages can offer very generous bonuses for deposits. We recommend taking advantage of these bonuses, which can help you earn up to 7% APY on your cash. Brokerages are the best way for most people to purchase the investments we discuss. As always, we highly recommend reading the fine print with these offers. We earn no money from these offers.

• E*Trade: Up to $4,000 in bonuses for deposits made within 60 days of enrollment. The lower deposit bonuses are also excellent, with E*Trade offering a bonus of $100 for a deposit of just $50. Offer here.

  • Use promo code PROMO24.

    • $50+ will receive $100

    • $1,000-$24,999 will receive $150

    • $25,000-$49,999 will receive $150

• tastytrade: Offering up to $5,000 in bonuses. Lower deposit bonuses are attractive, with a $100 bonus for a deposit of $5,000 (2% return). Offer here.

• Robinhood: Offering a 1% bonus for transferring any table brokerage holdings. No maximum, but deposits must be held for two years after account opening. Offer here.

Opportunities

Bank Bonuses

While we recommend passive savers and investors consider brokered CDs, money market funds, or floating rate ETFs instead, some people may want to take advantage of bank bonuses and promotional rates. As always, we highly recommend reading the fine print with these offers. We earn no money from these offers.

Bank Bonuses

• Eastern Bank (new) — $350 when you open a new checking account with a direct deposit of $4,000 or more. Offer here.

  • Availability: MA, NH, ME, or RI

  • Soft credit inquiry.

• Discover Savings Account (new) — With your first Discover Savings account, earn a $150 bonus with a $15,000 deposit, or a $200 bonus with a $25,000 deposit. Use offer code GOBP623. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry.

• USC Credit Union (new) — $250 bonus when you open a new checking account and set up direct deposit with a $1,000 minimum direct deposit every 30 days for the first 90 days of checking account AND make a minimum of ten (10) debit transactions every 30 days for the first 90 days of checking account opening. Use promo code SPRING24. Offer here.

  • Availability: CA.

  • Soft credit inquiry.

Opportunities

Credit Card Bonuses and Offers

Credit card signup bonuses are one of the easiest ways to earn extra income, as long as you are vigilant in managing payments, your credit score, and claiming bonuses. We know some of our readers are interested in the latest credit deals. As always, we highly recommend reading the fine print with these offers. We earn no money from these offers. The offers below show the best current offer at this time.

• American Express Hilton Surpass Card (new) — 150,000 points Hilton Honors points after spending $2,000 in 3 months. Get an additional 50,000 points after spending a total of $10,000 within the first 6 months. Offer here.

Picture of the Week

What We’re Reading

• How index investing informs income seekers. (S&P Dow Jones)

• When life forces your hand. (A Wealth of Common Sense)

• Understanding your why. (Spilled Coffee)

• The spectacular failure of the Star Wars hotel. (Jenny Nicholson)

• Caitlin Clark’s not-so-surprising childhood. (David Epstein)

Get Access to the Free Cash Rate Tracker!