Income Options for Retirees- Part II

Any investor who is seeking cash flow from their portfolio is likely feeling a great deal of frustration about the current investment environment. The Federal Reserve has orchestrated historically low interest rates in an effort to stimulate our anemic economy. Retirees have been especially hard-hit as CDs purchased before 2008 are maturing and similar investments are yielding a fraction of their previous returns. Last week, I discussed a range of fixed income (money market, CDs, bonds and bond funds) investment options and what was painfully obvious was that if you stick with high quality, you’re going to get a low rate of return. This week I’ll review a range of equity strategies that retirees could consider in order to boost their cash flow along with their ‘risk’ category.
Medium Risk
High Yield Bond funds. Now I realize that these are bonds but because of their more equity-style volatility, I typically include them as part of an equity allocation. These funds hold large baskets of non-investment grade (junk) bonds. Because of the higher risks, investors demand higher yields. If our general economy improves going forward, these type funds will tend to do well because of reduced defaults; if we roll into a second recession, they’ll struggle until the economy rebounds. Examples and their respective yields include: Vanguard High Yield Corporate (7.2%); or the Exchange Traded Fund HYG (8.0%).
Blue Chip Dividend-Paying Stocks. There are over seven thousand stocks traded on the various exchanges here in the U.S. but only a small percentage of these would be considered ‘blue chip’. And an even smaller number have consistently paid dividends to their shareholders. With blue chip dividend-paying stocks you get paid to wait until the economy gets back on track and stock prices rise. Examples, along with their current dividend yield includes: Southern Company (4.4%); AT&T (6.0%); Verizon (5.4%); Altria (6.2%); and Consolidated Edison (4.2%). You’ll want to own a basket of at least twenty of these type stocks to reduce ‘single-company risks’ or you can own a large basket by investing through an Exchange Traded Fund such as DVY (3.8%). These types of stocks are around 15% to 30% less volatile than the broad stock market. Under current law, the federal tax rate on dividends is limited to 15%.
Higher Risk
Oil & Gas Master Limited Partnerships (MLPs). These MLPs are essentially oil and gas pipelines that charge a ‘toll’ for moving product from one location to another. Good examples of major players and their respective yields include Kinder Morgan Energy Partners LP (6.8%); and Plains All American Pipeline LP (6.8%); or you can invest in a basket of MLPs through an Exchange Traded Note such as AMJ (5.5%).
Real Estate Investment Trusts (REITs). Think of a REIT as a company that owns a basket of investment real estate properties. Some invest broadly across types of properties such as apartments, office buildings, retail properties and are geographically diversified while others may focus primarily in one area such as apartments and are more geographically restrictive. REIT examples include the broadly diversified Vanguard REIT ETF yielding 5.4% and Weingarten Realty (symbol WRI) yielding 4.9%.
Each of these investments provides current cash flow to their investors along with the possibility of long-term appreciation as our economy recovers from the recent recession. If our economy falls into another recession, each would likely experience losses until a new recovery gets underway.
Be sure to consult your financial advisor before purchasing these investments.