All Parts Of A Peer-Reviewed Journal Have Been Peer-Reviewed More That Dad Forgot To Tell You About Income Investing: Q & A

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More That Dad Forgot To Tell You About Income Investing: Q & A

Not long ago, I was discussing “retirement readiness” with a small group of individuals, several of whom were already retired. None of them had ever owned or even heard of Equity or Income Closed End Funds (CEFs)… vehicles that I have used for decades in professionally managed portfolios.

It is assumed that readers have read the six questions and answers discussed in the first section.

—————————————-

7. Why do CEFs, public REITs and Master Limited Partnerships seem to be ignored by Wall Street, the media and most investment advisors?

All three are income producers, and once they’re “out there” in the market, they trade like stocks…on their own fundamental merits and price dependent only on supply and demand. Unfortunately, income programs have never attracted the same attention and speculative fervor as growth mechanisms of any variety.

Income Mutual funds and ETFs can optionally create stocks that have a market value equal to NAV (net asset value). But the sole purpose of each is to increase market value and generate a “gross income” number comparable to the stock market… income is rarely mentioned in their product description.

Providing an income goal can stay close to the same price for years, setting aside only 6% to 10% of income to fund a college education, retirement lifestyle, and world travel. But most investment advisors, ETF passives, and mutual fund managers are measured by the annual “gross returns” that their portfolios or indexes produce… Income programs don’t just generate year-end trips and six-figure bonuses.

  • I was fired several times before the dot.com bubble burst because my 10% to 15% “compensation” from high quality stocks and income producers just couldn’t compete with the speculative fever that drove the NASDAQ 5000 up. ..

  • But when the markets crashed in 2000 “No NASDAQ, no IPO, no mutual aid Funds = no problem“Operation Credo has led to significant growth and revenue.

Another issue is broker/advisor compensation at Wall Street firms…based entirely on sales of proprietary products and “investment committee” recommendations. There is no room for slow growth based on high quality dividend paying stocks and income closed-end funds.

Finally, government value and market value myopia precludes any inclusion of CEFs in 401k and other employer-sponsored investment programs. Vanguard’s VTINX Retirement Fund pays less than 2% after minimal fees; Hundreds of much better diversified CEFs pay 7% and even better after 2% or more. Yet the DOL, FINRA, and SEC have somehow determined that 2% of money is better than 7% in what they wrongly call “retirement income programs.”

  • You will never see a CEF, even equity or balanced portfolio CEFs, in a 401k security selection menu. Public REITs and MLPs won’t be there either.

8. How many different types of CEF are there; what investors pay for them; And are there any penalties for trading them frequently?

CEFConnect.com lists 163 tax-free funds, 306 taxable, 131 US equity and 204 non-US and others.

A partial list of types and sectors includes: Biotech, Commodities, Convertible Bonds, Covered Call, Emerging Markets, Energy, Equity Dividend, Financials, General Equity, Government Securities, Health Care, High Yield, Limited Duration Bonds, MLP, Mortgage Bonds, Multiples. Sector Income, Diversified National Municipalities, Preferred Shares, Real Estate, Principal Loans, 16 Different Individual State Municipalities, Tax-advantaged Shares and Utilities.

CEFs are purchased in the same manner and at the same price as individual stocks or ETFs, and there are no penalties, fees or additional fees for selling them frequently… They trade in free managed, fee-only accounts and always pay more in return than their ETF peers. and mutual funds.

9. What about DRIPs (Dividend Reinvestment Programs)?

There are at least four reasons why I don’t use DRIPs.

  • I don’t like the idea of ​​adding positions based on the original value.

  • I don’t like buying when demand is artificially high.

  • I prefer to consolidate my monthly income and select reinvestment opportunities that allow me to reduce the cost basis of the position while increasing the yield.

  • Investors rarely add to portfolios in down markets; Only when I need the flexibility to add new positions.

10. What is the most important thing an investor should understand when it comes to income investing?

In fact, if an investor can put his mind to just three things, he can become a successful income investor:

  • Changes in market value do not affect the income paid and rarely increase financial risk.

  • Prices of income securities move inversely Interest Rate Change Expectations (IRE)

  • Income securities should be evaluated based on the amount and reliability of the income they produce.

Let’s say that thirty years ago we bought a 4.5% IBM bond, a 30-year 2.2% Treasury bond, and 400 shares of 5.7% P&G preferred stock, all at par, and invested $10,000 in each. An annual income of $1,240 was collected in cash.

During this time, interest rates have fluctuated between a high of 12% and a recent low of 2%. They made no less than fifteen significant changes in direction. The market value of our three “fixed income” securities has been ten times above and below the “value base” while the portfolio’s “working capital” (the value base of the portfolio owners) has increased each quarter.

  • And every time the prices of these securities fell, their “current yield” rose while paying the same dividend and interest.

  • So why does Wall Street make such a fuss when prices fall? Why really?

Over the years, we have accumulated $37,200 in dividends and interest; The bonds and T-bills mature at $1,000 each, and the preferred stock still pays $142.50 per quarter.

So our cash account is now $57,200 and our working capital has grown to $67,200 while we haven’t lifted a finger or spent a single second worrying about fluctuating market values. This is the essence of income investing and exactly why it doesn’t make sense to look at it the same way as equity investing.

Investors need to be reprogrammed to focus on income producing investments with the objective of income and realizing reasonable profits when they are generated by securities with the objective of growth.

  • What if we invested the income every quarter in similar securities? Or sold securities when they rose 5%… and reinvested the proceeds in similar securities portfolios (CEFs), rather than individual entities, For diversification and higher yields?

  • Assuming a profit of only $500 per year and an average interest rate of 5%, the “working capital” of the portfolio would grow to $168,700… a profit of about 462%. Earnings will be $8,434 … profit 680%

I hope these conservative income numbers make you more than happy to have a serious income goal allocation in your “eventual retirement income portfolio”…especially income CEFs. Don’t let your counselor talk you into it; Stock market investments are not designed to do the job of income…reliably throughout our retirement lives.

  • CEFs allow anyone to invest in diversified portfolios of fixed income securities and, by design, always yield higher rates than individual securities.

  • CEFs are a uniquely liquid entity that allows investors to benefit from IRE-induced price changes in both directions. Yes, that’s what I meant.

11. Why should you profit if the security’s yield has not changed?

Compound interest is the “holy grail” of income investing. A 5% profit realized and reinvested today will work much better than 5% earned over the next few months. Also, when interest rates are rising, profit opportunities are scarce and earnings can be used more productively than under falling or stable interest rate conditions.

Let’s say we have a “limited duration” bond CEF that is 6%. We’ve been holding it for 8 months, so we’ve already made 4.5% and we can sell today for a 4% profit. So we can make 8.5% (actually a bit more after we made the previous profit) in just eight months.

We can then buy a new CEF yielding 6% or higher and hope to do a similar trade with our other holdings soon.

The second reinvestment strategy is to add several positions that are priced based on current value and yield more than the CEF we just sold. This is a great way to improve the “current income” of existing positions while ensuring that you have the opportunity to make more profits when interest rates fall.

12. How to maintain the growth of “working capital”.

Total working capital and the income it produces will continue until the income exceeds all withdrawals from the portfolio. Note that capital losses won’t affect income if the income can be reinvested at a higher “current” income… but working capital will suffer temporarily.

Portfolios are kept on track in their asset allocation with each batch of monthly reinvestment decisions, but the larger the target income “bucket”, the easier it is to ensure steady growth in both income and working capital.

13. What is retirement income readiness?

It is the ability to make this statement, unequivocally:

  • Neither a stock market correction nor rising interest rates will negatively affect my retirement income. In fact, it’s more likely that either scenario will allow me to grow both revenue and working capital even faster.

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