Value Investing / Main Index / previous / next

May, 2013


About the time my wife, Valerie, was in college, reasonably safe 6-month certificates of deposit were averaging roughly 11% a year, quite enough return for most folks. That train has left the station! Lately, 6-month CDs offer income of only 0.5% or less.

Suppose you or a child is going to be at the university and won't have time to work while engaged in studies. Or maybe you expect to be retired one day, yet your job doesn't provide much (or any) pension. For a number of reasons a significant, regular dollar stream can be just what is wanted and needed. So what is one to do for income today?

It is more complicated now, and higher returns are not so available as in, say, 1983. Yet it definitely is not "mission impossible."

For a really safe stash of cash, funds one can count on for a few months in an emergency, it still pays (for security plus a tiny bit of income) to invest in money market accounts (MMAs), for instance, FDRXX (0.01%).

Short-term bond funds, like BSV (1.51%), are almost as reliable as MMAs and offer a little more return.

For people who need greater proceeds and can handle less safety, there are several good options.

  1. Stocks with growing dividends may start at relatively low yields but over time can generate quite a lot of revenue: AAPL (2.60%); INTC (3.80%); COH (2.10%); MCD (3.00%), WU (3.20%).

  2. Health care real estate investment trusts (REITs) invest in real property but act like growth stocks: NHI (4.40%); HCN (4.10%); OHI (5.40%); SBRA (4.30%); MPW (4.90%).

  3. Global bond funds offer income plus diversification: GIM (4.40%); TEI (5.96%); PIGLX (4.72%).

  4. Municipal bond funds can provide really good after-tax returns: NUV (4.30%); VGM (6.72%).

  5. Limited partnerships often are better for tax-deferred accounts but can have fine yields: AB (6.20%); KKR (5.20%).

  6. Common stocks may also have excellent dividend rates: GLAD (9.40%); UNTD (6.10%); AEG (3.80%); AINV (9.10%); FIG (3.60%); VCI (5.10%); TOT (5.40%).

  7. Misc. real estate holding exchange traded funds can have even better ones: NLY (11.9%); REM (11.15%).

An equal investment in the cited assets would likely have somewhat above average risk for the short-term trader but should do well on a total return basis if held over the long-term. An investor would probably receive 5% or higher average annual income plus inflation-beating overall growth.

Is this the limit of income potential from a reasonably safe portfolio? Not at all. The examples are merely what came immediately to mind in considering the topic. The best fit for a particular situation will depend on one's own research and/or assistance from a trusted financial consultant.

Besides diverse configurations of securities and risks, there are other possible ways of drawing income from one's liquid holdings. A person might, for instance, borrow a small amount each year from an equity margin account or take a larger percentage annually from assets. Suppose one is already getting 5% a year of income from the portfolio but has a severe illness, is not expected to live more than 5-10 more years, has an adequate health insurance plan, and no heirs. Such an individual might well draw down the portfolio a few percent annually. Combined with dividends, an 8% per year overall generation of cash might well be realistic.

There is not a one-size-fits-all answer for portfolio income. The range of options is wide. More than one may work for each person's circumstances. We have not even touched on home equity loans, but if dealt with conservatively, they also can increase potential income amounts. (And no, I am not referring here to reverse mortgages, arrangements which often benefit the lender FAR more than the person seeking income.)

(Statistics above are as of the close of trading on 5/10/13.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next