Author Topic: Income Investments  (Read 7164 times)

dalekeener

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Income Investments
« on: October 11, 2015, 08:47:45 AM »
I am 54 years old no debt except a mortgage 94k (3.75%). I am adding a little extra to it each month but it will be paid off before I am 65 just making the regular payment.  I am looking to generate a little income from some of my investments (Schwab account). I was thinking of buying PGX, a preferred ETF yielding almost 6%. Does any one have experience with this fund or have any other ideas for income generation.

Thanks,

Dale

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Re: Income Investments
« Reply #1 on: October 11, 2015, 09:36:35 AM »
The expense ratio seems high to me, but I'm not too familiar with security investments.

Do you have an investment policy?

Financial.Velociraptor

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Re: Income Investments
« Reply #2 on: October 11, 2015, 10:11:02 AM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

starguru

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Re: Income Investments
« Reply #3 on: October 11, 2015, 06:17:31 PM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

Interesting -- but there must be some sort of trade off to get those kinds of returns...Is the risk higher in some way?

Thinkum

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Re: Income Investments
« Reply #4 on: October 11, 2015, 06:21:19 PM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

Interesting -- but there must be some sort of trade off to get those kinds of returns...Is the risk higher in some way?

I was thinking the same thing. I think the trade off is growth since these are bond type funds, they are capped to their yield. I could be wrong, but that would be the only downside I can see in these closed end funds.

starguru

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Re: Income Investments
« Reply #5 on: October 11, 2015, 06:24:43 PM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

Interesting -- but there must be some sort of trade off to get those kinds of returns...Is the risk higher in some way?

I was thinking the same thing. I think the trade off is growth since these are bond type funds, they are capped to their yield. I could be wrong, but that would be the only downside I can see in these closed end funds.

What does that mean?  Can you provide an example/numbers?  I'm trying to learn more about these types of things.

Financial.Velociraptor

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Re: Income Investments
« Reply #6 on: October 12, 2015, 12:02:39 PM »
The yields are inflated for two reasons.

The first is each of these funds uses between 30 to 40 percent leverage to boost returns.  (If you ever intend to sell, you are exposed to 30-40% extra risk as well, if you plan to hold until you expire, no worries.)

The second is the market is being irrational.  ETF's always trade at Net Asset Value (NAV) because they create or liquidate shares with demand.  With a CEF, there are a fixed number of shares that trade at a market price, sometimes NAV, sometimes more, sometimes less.  In the case of all the above, you can buy shares (currently) below NAV.  Most are more than 10% below NAV so you get 10 dollars of assets for 9 bucks or less.

I don't plan to ever sell these shares and only care about the yield on my cost.   So I don't think much about interest rate or market risk.  I only have to be concerned about defaults by the underlying securities and I mitigate that through using them all for extra diversification.

Left

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Re: Income Investments
« Reply #7 on: October 12, 2015, 12:37:06 PM »
my favorite preferred etf is pfxf, I just don't like having financials... and pfxf was an easy way to get reits/utilities into a tilt for me at the time. I just don't tilt now but I haven't sold it yet either since I see no reason to, just don't add more either

eddy20

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Re: Income Investments
« Reply #8 on: October 12, 2015, 08:52:39 PM »
interesting as I'm looking for income also; I have invested in DNP for years and the yield is about 7.8%, any opinions? Or better options?

Scandium

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Re: Income Investments
« Reply #9 on: October 13, 2015, 10:33:54 AM »
.  I am looking to generate a little income from some of my investments (Schwab account).

Sell a fixed dollar amount of your portfolio, in accordance with your AA, every month? Seem easy enough to me, doesn't have to be complicated.

RecoveringCarClown

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Re: Income Investments
« Reply #10 on: October 13, 2015, 01:50:11 PM »
Hmm, I never really thought to much about this (still in my growth stage).  What percentage of your portfolio are you allocating to these?  Are you using these as a total replacement for bonds after FIRE, 30-40% perhaps?

LAGuy

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Re: Income Investments
« Reply #11 on: October 13, 2015, 03:04:54 PM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

Interesting -- but there must be some sort of trade off to get those kinds of returns...Is the risk higher in some way?

I was thinking the same thing. I think the trade off is growth since these are bond type funds, they are capped to their yield. I could be wrong, but that would be the only downside I can see in these closed end funds.

What does that mean?  Can you provide an example/numbers?  I'm trying to learn more about these types of things.

I took a look at some of them. There's a couple different types of funds there, but essentially they're corporate debt funds (except the muncipal fund) with a bunch of leverage to get the high yields. There's a couple of catches.

1) Need to watch where you hold these. The municpal fund would be appropriate in a taxable account. The rest in tax protected accounts. I didn't look at all of them, but the point is: be careful of the tax treatment.

2) High fees. The leverage needs to be paid for.

3) The corporate funds are at risk of default. You could see the NAV drop and not see your yield go up. Due to the leverage, the NAV could drop a lot. Even if you held to maturity (do bond funds even have maturities?) you could see nothing at the end. Incidentally, the paper in some of these funds is secondary to primary debt holders. More yield, but in the case of a default, these funds will be the first to be hit.

4) Corporate debt tends to behave as stocks do. That is, if the market crashes...so will corporate debt. It's not a hedge against a declining market like government bonds are.

Are they risky? Probably nearly as risky as stocks. And pricey. Are they appropriate? Who can say. I probably wouldn't invest in them myself...to much hassle to track it all. It's one way to skin a cat though.
« Last Edit: October 13, 2015, 03:06:34 PM by LAGuy »

milesdividendmd

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Income Investments
« Reply #12 on: October 13, 2015, 03:15:22 PM »
You can do better than 6% and still stay diversified.

My bond and bond like allocation is in a few places:

* closed end municipal bond funds (tax exempt) paying around 6% [IIM, IQI, NEA, NIO]
* closed end preferred shares fund yielding 7.8% [JPS]
* closed end senior floating rate debt fund yielding 7.5% [JRO]
* closed end variable rate bond fund yielding 6.8%[EFT]

The last first two groups are in fixed rate investments and last two in variable rate notes.  You can do better than 6% and with the variable rate options have upside exposure to the Fed increasing the interest rate.  I go with closed end funds for these types of instruments only.  Reason is, in a rising rate environment prices of the underlying assets will fall.  If investors can get redemptions, the fund is forced to sale at a loss hurting remaining investors.  Closed end funds never have redemptions and can hold the notes to maturity, hedging away a lot of interest rate risk.  The intent here is to hold these tickers until Kingdom.  They are paying enough I should never need to sell shares for income.

I just don't see the point of such investments.  As an example, why invest in JPS at all?  You get all of the downside of stocks (see 2008 ) , with less upside.  This gives you no diversification when you need it the most.  Add to that less liquidity and the point of it all is lost on me.  This seemingly has the risk/return profile of a stock with less upside and less liquidity.

Plus whats so great about "income?"  It's a mandatory taxable event.  Capital gains are far more tax efficient and you can control when you are taxed.

Keep it simple.  Keep it cheap.
« Last Edit: October 14, 2015, 02:24:01 PM by milesdividendmd »

Telecaster

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Re: Income Investments
« Reply #13 on: October 13, 2015, 03:24:05 PM »

Plus whats so great about "income?"  It's a mandatory taxable event.  Capital gains are far more tax efficient and you can control when you are taxed.

Keep it simple.  Keep it cheap.

Cosigned.  Full disclosure: I do use a dividend strategy for a small part of my port.  The idea is that income will balance during times of long market downturns or sideways movements.  Personal opinion that.   But over all, I'd much rather have capital gains that dividends.   

Financial.Velociraptor

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Re: Income Investments
« Reply #14 on: October 14, 2015, 07:31:15 AM »
Hmm, I never really thought to much about this (still in my growth stage).  What percentage of your portfolio are you allocating to these?  Are you using these as a total replacement for bonds after FIRE, 30-40% perhaps?

RCC, I'm already in FIRE so having mandatory taxable events make sense for me.  I keep these about 35% of port.  They throw off enough income that I don't need to sell any to meet living expenses so very little interest rate risk.

starguru

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Re: Income Investments
« Reply #15 on: October 14, 2015, 08:31:37 AM »
Ugg this thread is just contributing to my analysis paralysis.   By the end of the week Ill have 50k in cash I need to deploy and I can't figure out what to do with it.  I was going to  do muni bond fund (this is in taxable and I'm close to the 39% bracket) but this thread got me thinking about alternatives.  That combined with fear of rising interest rates has really got me stuck, and meanwhile my money is doing nothing. 

milesdividendmd

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Re: Income Investments
« Reply #16 on: October 14, 2015, 02:26:54 PM »
Star guru. Investing in these instruments in a taxable account is exactly the wrong thing for a high earner like you to do.

They are extremely tax inefficient.

A muni investment may make sense if you need bonds for your allocation.

Otherwise. Keep it simple.  Keep it cheap.

starguru

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Re: Income Investments
« Reply #17 on: October 14, 2015, 05:52:57 PM »
Star guru. Investing in these instruments in a taxable account is exactly the wrong thing for a high earner like you to do.

They are extremely tax inefficient.

A muni investment may make sense if you need bonds for your allocation.

Otherwise. Keep it simple.  Keep it cheap.
Sure, but even in the muni space there is a lot of analysis.  Long, Medium, Short, yield or quality, fidelity or vanguard or MUB....  What would you do with cash in a taxable account?

milesdividendmd

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Re: Income Investments
« Reply #18 on: October 14, 2015, 05:58:01 PM »
I put all of my taxable into Betterment, mostly stocks.

They have muni funds in the bond mix for taxable.

And with tax loss harvesting it is has been better than free.

starguru

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Re: Income Investments
« Reply #19 on: October 14, 2015, 06:40:19 PM »
I put all of my taxable into Betterment, mostly stocks.

They have muni funds in the bond mix for taxable.

And with tax loss harvesting it is has been better than free.

My $$ is at Fidelity.  This discussion has got me looking over the offerings.  There is FTABX but in the composition tab it shows extreme sensitivity to interest rate change.  only 10% of constituent holdings have durations  less than 2 years.  FHIGX seems similar; I can't tell the difference between these funds. 

Then there is something like FSTFX, Limited term municipal, which seems less sensitive to interest rates at the cost of return. 

I just don't know what to do.

index

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Re: Income Investments
« Reply #20 on: October 15, 2015, 09:20:15 AM »
You all should learn to sell options to generate income instead of speculating on leverage bond funds.

Covered calls on your index etf's, cash covered put spreads, and even iron condors are a good way to generate some returns off your holdings without buying instruments you don't understand.

BTW - The reason why CEFs trade at a discount is the high expense ratios. I looked at EFT and its expense ratio is 2.16%. (1.2% management fee, .16% advertising fee, and 0.8% interest expenses). 10-yr returns of 4.86% assuming dividends were reinvested and is more volatile that the S&P 500. The winners in the CEF world are the fund managers. It actually under-performs the S&P with more risk for on a 1, 3, 5, and 10 year time horizon. YTD is the only year it has outperformed returning 0.5%.

Scandium

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Re: Income Investments
« Reply #21 on: October 15, 2015, 09:57:57 AM »
You all should learn to sell options to generate income instead of speculating on leverage bond funds.

Covered calls on your index etf's, cash covered put spreads, and even iron condors are a good way to generate some returns off your holdings without buying instruments you don't understand.

I'll admit I only have a basic understanding of options, but what happens when I miss the guess on the target price and my index ETF is called away and I'm stuck with cash < the price of the ETF x shares?

YoungInvestor

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Re: Income Investments
« Reply #22 on: October 15, 2015, 10:24:14 AM »
You all should learn to sell options to generate income instead of speculating on leverage bond funds.

Covered calls on your index etf's, cash covered put spreads, and even iron condors are a good way to generate some returns off your holdings without buying instruments you don't understand.

I'll admit I only have a basic understanding of options, but what happens when I miss the guess on the target price and my index ETF is called away and I'm stuck with cash < the price of the ETF x shares?

You buy back less shares, while still havibg realized a profit (but creating a taxable event, afaik. I've only written options in my registered account)

index

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Re: Income Investments
« Reply #23 on: October 15, 2015, 11:54:50 AM »
You all should learn to sell options to generate income instead of speculating on leverage bond funds.

Covered calls on your index etf's, cash covered put spreads, and even iron condors are a good way to generate some returns off your holdings without buying instruments you don't understand.

I'll admit I only have a basic understanding of options, but what happens when I miss the guess on the target price and my index ETF is called away and I'm stuck with cash < the price of the ETF x shares?

You can also buy the call back if it goes through your strike to prevent you from having a taxable event. The call will be more expensive and you will lose money on that trade. You other option is to roll the covered call forward- Say you own have sold the 10/16 calls on VTI at $102 and it is now at $103.26. Instead of just taking your $132 loss, you can sell the $104 November 20th covered call for $130 and use the proceeds to cover you loss (now $2). You can keep rolling the options forward in this manner until the direction reverses and you collect a premium.

You can sell calls further out of the money and make less of a premium but they have a lesser chance of being called. Covered calls are probably the easiest to understand but there is still quite a bit to learn about them.

Selling puts is actually the most profitable options strategy. Say you want to buy VTI. Instead of just buying 100 shares of VTI at $103, sell the $103 put november put for $2. If VTI falls below $103, you will be assigned the shares but your total outlay will be $10,100 instead of $10,300. You can roll these forward too. Say VTI goes to $105 in two weeks, sell the $105 put and buy back the $103 put that will now have decreased in value. If/when the stock is eventually assigned to you, you will be in the same position you would have been if you had bought in the first place, but your cost basis will be less.

An iron condor is essentially selling a spread above and below the strike price. As long as the price stays in the band you have assigned, you keep the premium.

I often sell 3 month put spreads on Berkshire Hathaway. Buffet said Berkshire will buy back shares at 120% of book value which is ~$120. You can sell the January $120 put and buy the $115 put for a net credit of $50 right now. Your maximum loss is $450 ($12000-$11500+50). This is a 10% return in 3 months.

I wouldn't recommend doing this with your entire account by any means, but when you do this kind of thing in a diversified manner it can give you a nice income from your index funds without having to resort to yield chasing.

By diversified I mean this: Say you own 1000 shares of VTI. Say you sell 10 covered calls for $107 December 18th for $85 each. Then sell 5 $97-$95 put spreads for $35 each. Your net credit will be $1025. If VTI is between $107 and $97 on December 18th you pocket $1025 (1% in 2 months) for a 6% annualized yield. If VTI falls below $95 you will be out $1000 (which is covered by your premiums). If it goes above $107, roll the options forward and you get to keep the premium from the put spread.