My parents are aging rapidly. Whenever I would bring up the topic of long-term care insurance with my dad, he would laugh. I was his long-term care policy, he’d say.

 

He might be on to something.

 

#-ad_banner-#Aging Americans, especially baby boomers, are facing a conundrum: longer life spans thanks to advances in medicine and extremely low interest rates are changing the retirement math.

 

Don’t look for either situation to change any time soon. In fact, low rates may stay in place for another twenty years or so.

 

Can we blame low rates on a sluggish economy? Not really. The Fed? Not yet.  Looks like aging populations are a driving factor.

 

Retirees depend on conservative, high quality, fixed income investments to supply predictable income during their retirement years. Typically that means U.S. Treasury securities, high quality bonds or investments holding those types of securities such as mutual funds or exchange traded funds (ETFs).

 

The same goes for the institutions that manage those income streams, such as pension funds or insurance companies. Those entities need to lock in interest rates on a long-term basis in order to manage their long-term liabilities.

 

With a huge pool of buyers, the supply of bonds should remain relatively tight. Here’s what the yield on the 10-year Treasury currently looks like.

 

 

As the first wave of the American baby boom begins to enter retirement, they are seeing interest rates move ever lower. 20% of the U.S. population will be over the age of 65 by 2029, according to data from United States Census Bureau.

 

If you’re wondering where interest rates will be by 2029, Japan holds an important lesson. According to the Japanese Ministry of Health, 20% of the Japanese population is aged 65 or older. In tandem, Japanese bond yields have declined more than 80% in the last seven years.

 

 

To be sure, Japan has unique factors in play. Its economy has been sluggish ever since the Japanese stock and real estate bubble burst in 1990s.

 

Moreover, Japan’s population has actually been shrinking, from a peak of 128 million people in 2010, to a projection of roughly 87 million by 2060. By then, nearly half of the Japanese population will be age 65 and over.

 

While the United States’ demographic forecast is not quite as dire as Japan’s, there is some cause for concern. At current ratres, seniors will eventually outnumber our total population under 18 years of age, according to the same Census Bureau data.

 

Although our population is not slated to shrink, as is the case in Japan, the graying of society is bound to keep a lid on interest rates.

 

So what are the challenges ahead? First, income-seeking investors must find investments that offer predictable income streams above prevailing interest rates.  

 

What about Treasuries? Though rates will likely remain stable in coming years, there’s just not a lot of room left for bond prices to move. Sure, there’s some money to be made on short-term fluctuations, but leave that to the institutional big boys.

 

For individual investors, businesses that benefit from a low-rate environment and those with above average dividends make the most sense. I’ve found a handful of stocks that do both.

 

The Blackstone Group LP (NYSE: BX)
Blackstone is at the top of the food chain in the private equity business and nothing seems to be slowing the firm down. In 2014, per share profits jumped 30%to $2.58 on revenue growth of 13% (to $7.48 billion).

 

Lower interest rates will provide Blackstone with access to cheap investment capital. Shares trade around $37.55 with a below-market forward price-to-earnings ratio of 10 and an attractive 8.4% yield per unit distribution. I profiled Blackstone in an earlier piece about the “Graying of America.”

 

AllianceBernstein Holding LP (NYSE: AB)
With nearly half a trillion dollars in assets under management (AUM), AllianceBernstein has a solid reputation as a research driven, institutional money manager.

 

With 55% of the firm’s AUM in fixed income, persistent low rates should keep that portion of their book stable and any near-term rallies in bonds here and there should increase AUM, thus improving fees (asset managers are paid fees based on how much money they manage).

 

With boring, uninspiring bond markets adding buoyancy to stock markets, the company is well positioned: 70% of their actively managed equity funds consistently outperforming their benchmarks. At around $24.35, LP units trade with a forward P/E of 13.6 and a generous yield of 7.3%

 

Senior Housing Properties Trust (NYSE: SNH)
The name pretty much says it all. As a real estate investment trust, SNH owns and leases skilled care, assisted living and independent living communities. With the U.S. population heading toward 20% aged 65 and older, this is a great bet.

 

Lower interest rates will continue to help the company acquire new properties for its high quality portfolio. The REIT currently has $540 million in acquisitions pending. A stable rate environment also means that the company can manage its balance sheet risk in the future by locking in better terms.

 

Shares trade at around $23.15, a 17% discount to net asset value and yield a T-bond busting 6.9%. I’ve written in the past about this “Forever” stock and I still feel just as strong about my investment thesis.

 

Risks To Consider: While I’ve spent some time discussing the longer end of the yield curve, shorter-term interest rates are probably susceptible to rising in the near term. Whether rates rise mechanically (thanks to the Fed), or they rise organically through market forces, expect these stocks to experience some volatility.

 

However, the higher yields more than adequately compensate the investor for that risk. Also, what author Nassim Taleb describes as a “black swan event” could affect long rates. If China woke up tomorrow and decided to dump the trillions of dollars worth of U.S. Treasuries they hold (not likely), then, yes, long rates will go up.

 

Action To Take –> There’s an old saying in the investment racket: “Don’t fight the tape” meaning don’t try to go against the market trend. Many investment gurus, including “Bond King” Bill Gross, were completely wrong about treasury rates rising.

 

And the tape, driven by demographics, is telling us that rates should stay low. As a basket, these stocks throw off a combined yield of 7.5%; nearly four times higher than what the 10-year U.S. Treasury bond pays. Benefiting from low rates, the accompanying demographic trends, and consistent operating results, these stocks could deliver solid long-term returns, perhaps in excess of 10% annually, when income streams are included.  

 

.If you’d like to learn more about utilizing stocks for your retirement, then you should check out The Daily Paycheck. This newsletter focuses on putting dividend payers to work for you — and your retirement. The Daily Paycheck strategy has helped Amy Calistri, our resident income investor, pocket more than $76,000 since she began using it in December 2009. And her portfolio is safer than the S&P 500. We, at StreetAuthority, have been so impressed that we urged her to spread the word to a wider audience. That’s why, for the first time, Amy took the stage to explain exactly how The Daily Paycheck strategy works. If you haven’t already, I encourage you to watch the exclusive presentation here. You won’t be disappointed.