Goldman Sachs says 2025 will be the ‘year of generating income’

Goldman Sachs Asset Management is predicting 2025 will be the “year of generating income.” The firm expects less upside for equities going forward, and suggests that adding income-earning assets to a portfolio could help produce the same type of returns that investors enjoyed this past year, said Ashish Shah, the firm’s chief investment officer of public investing. “Valuations are high enough that if you can figure out how to … reduce the volatility of your assets, generate income, and still capture some of that equity upside, that’s going to be what works in 2025,” Shah said on Goldman’s 2025 outlook conference call. Still, investors are going to have to get creative in how they generate income , since credit spreads are tight, he said in a separate interview with CNBC. Spreads measure the difference in yield between Treasurys and other fixed-income assets of the same maturity. In addition, “easy” income, like the high yields in cash equivalent accounts like money market funds or in Treasury bills, will be tougher to find as the Federal Reserve continues its rate cut cycle, Shah added. For instance, the annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is currently 4.46%. That’s down from the 5.20% high at the end of last year, according to Crane Data, a firm that tracks money markets. Here are three ways investors can nab some extra income next year, according to Shah. Options strategies Investors can employ an options strategy called buy-write, which entails buying a stock and then selling call options against those shares. Investors can get the capital appreciation from the stock at the same time they earn income from the options, Shah explained. There are funds that employ this strategy, including exchange-traded funds from Goldman. One focuses on the S & P 500 — Goldman Sachs S & P 500 Core Premium Income ETF (GPIX) and another on the Nasdaq-100 index — Goldman Sachs Nasdaq-100 Core Premium Income ETF (GPIQ ). High-yield muni bonds Shah also sees opportunity for income within high-yield municipal bonds . The assets are generally loved by high income investors since the income is free of federal taxes. It is also exempt from state taxes if the investor resides in the same state as the bond issuer. “Municipal high yield is a good way of generating income that can compete with your appreciation,” Shah said. There are still pretty healthy yields in muni bonds farther out on the curve, he noted. There is also plenty of infrastructure such as roads and ports that remain to be funded, he added. GHYAX YTD mountain Goldman Sachs High Yield Municipal Fund Dividend stocks and bonds Investors can also turn to more traditional forms of income in dividend stocks and fixed income, Shah said. He envisions it as a balanced portfolio but delivered in a different way. The equities portion is focused less on pure capital appreciation and stocks with high price-to-earnings multiples, and more on companies that are generating cash flow and paying dividends. Fixed income consists of high-yielding securities, which tend to be risker than investment-grade bonds. “If you buy the stocks that have bond-like characteristics and the bonds that have stock-like characteristics, they generate more income,” he said. Shah particularly likes securitized products in the fixed income bucket. There is some protection from direct losses that might result from defaults affecting small fractions of a portfolio, but investors still get the income pick up to more than compensate, he said. Within securitized, he sees opportunities in collateralized loan obligations (CLOs), which are securitized pools of floating-rate loans to businesses. They sometimes include non-investment grade borrowers. He also sees opportunity in commercial mortgage-backed securities. “Lending to commercial properties is an area where you are still benefiting from banks pulling back” on such loans, Shah said. “Fundamentals in those spaces are generally bottoming, so you can do a better job of understanding the downside risk that you are bearing of the income you are generating.” Finding the best opportunities However, investors should not necessarily focus on choosing just one of these strategies, Shah said. “We believe that rather than pick one of those, you can generate good income by finding the best opportunities across those three markets — a mix of buy-write when it is timely, dividend-paying companies and high yielding bonds,” he said. “Doing that mix actually allows you to construct a portfolio where you generate the most attractive risk-return income that is available in the marketplace,” he added.