Written by Alex Seleznev, MBA, CFP®, CFA | May 8, 2024
Interest rates will likely stay high for a while. Why not take advantage and increase your portfolio income?
Alex Seleznev was recently quoted in Kiplinger's annual “Yieldfest” article which focuses on identifying the best income investment options (see bottom of this newsletter).
If your portfolio has significantly increased in value over the past few years, this may be a good time to make it more income-oriented and/or stable.
But before we get started…
Why should you even consider increasing your portfolio income?
Many investors, specifically retirees, take on too much risk by focusing extensively on maintaining a "balanced" portfolio. They keep too much in unpredictable international and volatile small-cap stocks just to conform to a conventional investment process. Depending on your portfolio size, it may be possible for you to cover a significant portion of cash needs through investment income.
Just imagine the peace of mind that comes with knowing your investment income covers most, if not all, of your expenses. This is a powerful concept.
So, let’s discuss your options.
Low risk, lower yield
Money market funds (5.25%), short-term treasury bonds (5.50%) and dividend stocks (3%-5%).
Almost any portfolio should have at least some of these investments.
They are ideal for supporting your ongoing cash needs, improving your portfolio income, and can be used to buy stocks at lower prices when the market is down.
Depending on the size of your portfolio, it may be possible to adjust it so that most of your cash needs are covered by income generated from lower-risk investments.
Keep in mind that keeping too much in low-risk investments can be dangerous in the long run as they don’t provide much protection against inflation.
Medium risk, higher yield
Municipal bonds (4%-7%), corporate bonds (5%-7%) and high-yield bonds (6%-9%).
Depending on your tax situation, most of these are appropriate to use as part of a diversified bond allocation.
At Capital Squared, we refer to such an allocation as a “bond ladder” or “buffer allocation”.
Corporate and high-yield bonds should be kept in tax-deferred accounts such as an IRA.
Municipal bonds are a good choice for taxable accounts but can be hard to find in certain states.
High risk, highest yield
Real estate investment trusts (4%-6%), business development companies (9%-10%) and closed-end funds (4%-12%).
Real estate investment trusts, or REITs, offer a strong combination of growth and income potential.
Business development companies, or BDCs, borrow funds and then lend to their portfolio companies.
Closed-end funds, or CEFs, can use leverage to buy stocks and bonds to increase their yields.
There is a place and time for each of these investments. However, investing in any of the options in this category requires specific investment experience and should be left to professional investors.
Please understand that the ideas in this article are for educational purposes only and should not be considered investment advice. We strongly encourage you to do your own due diligence or work with a qualified investment professional if you decide to implement any of the ideas discussed in this article.
The full Kiplinger article can be found HERE. Special thanks to Andrew Tanzer for doing such an incredible job putting together a comprehensive annual list of income investment options!