Articles about Income Investing

The Ultimate Income Portfolio: 7.1% Yield with Low Risk, 2014
In July of 2010, I introduced a portfolio-construction strategy called the Ultimate Income Portfolio (UIP). I have updated that strategy annually, revising the holdings and reviewing the previous year’s results. My goal is to provide the maximum available yield while diversifying to reduce risk. I set a target risk, which is within the range that most individual investors seek. I also sell covered call options against portfolio holdings to increase income.

In this article, I analyze the performance of last year’s UIP and generate the UIP for 2014-15. The result is a portfolio that yields 7.1% with a risk level equivalent to a 70/30 stock/bond index fund. I also explore some of the lessons learned from four years of tracking and revising the portfolios.
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Understanding the Controversy over Dividend-Based Investing, 2014
Should investors favor dividend-paying stocks over non-payers? A long-held investment tenet contends that they should. But in a controversy that has pitted two highly respected investment firms – New York-based Tweedy Browne and Texas-based Dimensional Fund Advisors (DFA) – against one another, advisors are being asked to reexamine this issue.
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The Bomb Shelter Portfolio: Maximum Income with the Least Risk, 2013
Conservative investors are faced with unappealing choices. They can reduce risk and accept low yields and high exposure to rising rates, or they can push the bounds of their risk tolerance to increase yield. My analysis shows a way out of this predicament: a “bomb shelter” portfolio of exchange-traded funds (ETFs), which offers attractive yield with minimal volatility and exposure to rising rates.

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The Ultimate Income Portfolio Revisited, 2013
Rising interest rates will be unkind to income-generating assets and the investors who depend on them in retirement. My ultimate-income portfolio (UIP) provides a solution to this problem. It has reliably produced high income and low volatility with respect to the stock market, and its performance is likely to continue, even if rates rise further.
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Do Income-Oriented Portfolios Reduce Safe Withdrawal Rates?, 2013
Among studies of safe withdrawal rates (SWRs) researchers have followed a common path: constructing portfolios with the goal of optimizing total return. This strategy achieves the highest SWR, but retirees often prefer a more income-oriented portfolio. I will illustrate the tradeoff investors make – in terms of a lower SWR – as they increase allocations to income-producing securities. But increasing income also brings a key benefit: lower estimation risk.
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A Better Alternative to Cap-Weighted Bond Indices, 2013
Capitalization weighting is the prevailing choice for equity index investors, who can choose from low-cost index funds constructed with theoretically proven methodologies. But capitalization weighting in fixed-income markets enjoys no such theoretical foundation, leaving investors without a clear choice for a diversified core fixed-income holding. A portfolio of bond exchange-traded funds that optimizes the tradeoff between yield and risk gives investors a commendable way to own a broadly diversified core allocation.

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The Superiority of Dividends: A Comparison of Value Strategies, 2012
Dividend-focused strategies have won the allegiance of many prominent investors, including Rob Arnott, Bill Gross and Jeremy Siegel. Others claim value-based strategies offer superior risk-adjusted returns. Both sides can claim a partial victory in this debate, but I will show that, when understood properly, dividend strategies offer a crucial edge – one that many investors will find attractive.

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Is Gluskin's David Rosenberg Right about Utilities?, 2012
They’re not the sexiest property on the Monopoly board, but in today’s market, there’s plenty of evidence mounting that utilities are a great source of income. Gluskin Sheff’s David Rosenberg made the case for utilities in his September 6 commentary. Taking a contrarian view, Rosenberg acknowledged that utilities are universally disliked by Wall Street analysts and have performed poorly relative to other sectors this year. But utilities offer a 4.2% yield – nearly twice that of the market....they deserve a substantial...
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The Ultimate Income Strategy: Higher Yield and Lower Volatility, 2012
Investors, especially those in the de-accumulation phase of their retirement, count on high income and low volatility. Achieving the best possible tradeoff between yield and risk is a major challenge for advisors. Over the last two years, I’ve shown how to construct a low-risk portfolio – the ultimate income portfolio (UIP) – that yields over 9.0%. Let’s look back at how those portfolios performed and the components of this year’s UIP.
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High Yield and Low Risk: Finding the Best Closed-End Funds, 2012

Yield-starved investors have ventured into exotic – and often risky – assets, including hedge funds, non-traded REITs and private placements. But an asset class that has been around since 1893 offers a compelling combination of low risk and high income. A carefully selected portfolio of closed-end funds (CEFs) will yield 8% with less volatility than the S&P 500.

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Can You Create a 7% Yield Portfolio Focusing on Munis and Dividend Stocks?, 2012
In “Can You Get 7% Per Year in Income with Only Moderate Risk?”, a blog I wrote back in the beginning of December, I analyzed a portfolio with 7% yield and “moderate” risk. My analysis suggested that it was possible to create a portfolio with 7% yield and about the same level of risk as a portfolio allocated 50% to a total market stock index (VTI) and 50% to a broad bond index (BND). My analysis also suggested that this portfolio had a projected volatility of 15% on a going forward basis. A helpful reader (see his comments by clicking on the article above and scrolling to the bottom of the page) found that this portfolio lost 25% from the peak to the trough for equities in the crash of 2008. MyPlanIQ found that this portfolio lost a total of 18% for calendar year 2008. To put this in context, the Vanguard 2010 Target Date Fund (VTENX) lost more than 20% in 2008. Needless to say, we have experienced very volatile markets in recent years.
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Optimizing Your Fixed Income Allocation, 2011
Here’s a little-known fact: The traditional 60/40 portfolio, when using the aggregate-bond index for its fixed-income allocation, has a 99% correlation to the returns of the S&P 500. Rob Arnott pointed this out in 2004, and it remains true today.

One way to overcome the limited diversification value offered by the aggregate index is to use a risk-parity approach. In this article, I explore the concept of risk parity in asset allocation and how it provides value for portfolio management.
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Building a Better Income Portfolio, 2011
One of the greatest concerns for income-oriented investors is the possibility that dividends will be cut. The financial crisis showed that traditional metrics, such as a stock’s dividend history and its payout ratio, failed to warn investors of impending dividend cuts. By evaluating stocks based on volatility, however, investors can select securities that are more likely to maintain or improve their dividend rates.
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How to Build a Low-Risk High-Income Portfolio, 2011
Prominent investors, including Bill Gross and Warren Buffett, now say that the yields on long-term government debt do not justify the risks. But is this perception correct? I offer a way to answer that question – and to construct a low-risk high-income portfolio – using the prices of put options to derive the true risk levels of various asset classes.
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Improving on the Ultimate Income Portfolio, 2011
The Ultimate Income Portfolio, which was published in this newsletter July 6 of last year, has delivered the risk-adjusted returns that I projected. Here’s a detailed look at how last year’s portfolio performed and several ways it can be improved in today’s environment.
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Do-It-Yourself Equity-Indexed Annuities, 2011
Equity indexed annuities offer retirees a compelling combination of guaranteed income and participation in the market’s upside. But EIAs are exceedingly complex and have been the subject of numerous regulatory challenges. For those who seek a simpler alternative with a comparable return profile, a combination of fixed-income securities and options is viable choice.
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Reexamining Bill Gross’ Decision to Sell Treasury Bond, 2011

Bill Gross made headlines in February by asserting that U.S. Treasury bonds were not providing enough yield to make them worth the risk and reducing his allocation to zero in the PIMCO Total Return Fund (institutional share class PTTRX). The subsequent rally forced him to admit his mistake in August, but by then his fund was trailing 90% of its peers and having its worst year since 1995. I will examine Gross’ February decision in retrospect, to illustrate its tactical and strategic costs and benefits for his shareholders.

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Can You Get 7% Per Year in Income with Only Moderate Risk?, 2011
With ten-year Treasury bonds yielding around 2%, many investors are looking for investments that can provide higher levels of yield. Barron’s just ran a cover story on this topic, titled How to Get Safe Annual Payouts of 7%: Despite rock-bottom interest rates, you can still earn investment income of 7%-plus per year. How to keep money flowing during retirement.

But is it really possible to create a low-risk portfolio with a yield of 7% or more?

The prevailing low yields on Treasury bonds are encouraging many income-oriented investors to look beyond the relative safety of government bonds. The big challenge for income investors is not simply to find high-yield assets but to find high-yield assets with tolerable levels of risk.
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Why High-Yield Bonds Make Sense Today, 2011

None other than Gluskin Sheff’s Dave Rosenberg, the widely followed analyst who was been consistently bearish in the current market cycle, said last week that high-yield (HY) bonds are “a good place to be right now.” Recent price declines have made them attractive in the short term, and their risk-adjusted returns make them attractive to longer-term strategic investors.

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Flaws in Vanguard’s Withdrawal Strategy: Income versus Total-Return Portfolios, 2010
Vanguard advertises that its mission is to simplify investors’ retirement decisions. In a recently published study, however, it oversimplified the critical choices investors and their advisors face in constructing a portfolio for the withdrawal phase of retirement.
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The Ultimate Income Portfolio, 2010
Income investors seek a substantial, long-term income stream from their portfolios, and they don’t want to rely on capital appreciation or to deplete principal. Also seeking income may be investors who do not want to rely on economic growth to fuel returns on their investments.
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Three Ways to Improve Safe Withdrawal Rates, 2010
Few problems facing financial planners have been as extensively studied as sustainable withdrawal rates (SWRs). Today, the conventional wisdom holds that a 4% SWR is reasonable, given a traditional 60/40 approach. But higher SWRs can be achieved in a number of ways, and the last chapter in the search for better deaccumulation planning is yet to be written.

Using Monte Carlo analysis, I recently examined three ways SWRs can be increased. I compared and quantified the benefits of increasing diversification beyond equities and bonds, increasing allocations to fixed income, and employing tactical asset allocation (TAA).
Additional Dimensions of Value Investing, 2009
One challenge for value investors is that any given statistical metric of value can mean different things. Dividend yield, in particular, is a problematic measure. The dividend yield can be high because a company is solid and throws off robust earnings that are returned to shareholders, but dividend yield can also be high for a company in distress that has seen its stock price plummet but that has not yet seen its dividends reduced to reflect its current status. There are other challenges, too. Some companies employ ‘leveraged’ dividend strategies in which they will pay out more in dividends than their actual earnings. This surely cannot be compared to companies that only pay shareholders a fraction of real earnings.
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Dividend Aristocrats Will Continue to Outperform, 2009
There are some solid arguments that dividends will represent the bulk of returns from stocks for a number of years into the future. Regardless of whether this is correct or not, there is a broad consensus that capital appreciation will be sufficiently low that we will see, on average, 8% annual returns per year from domestic equities. This is generally in line with estimates from a range of sources, albeit on the conservative end. These factors suggest that even investors who are not specifically focusing on income may do well to spend some time looking closely at dividend yields. That said, the dismal performance of dividend focused index funds like DVY over the last couple of years makes it clear that it is unwise to blindly invest on the basis of yield.
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Income Planning and Safe Withdrawal Rates, 2008
It has become more and more evident to me that most investors have almost no real sense of what they need to save for retirement—an issue that is closely linked to the problem of determining how much income an investor can safely draw from his/her portfolio to reliably support a long-term income stream. This is obviously one of the most crucial issues in retirement planning.
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