A small group of people, many of whom were already retired, I recently spoke with about “retirement readiness.” I have used equity or income Closed End Funds (CEFs) for decades in professionally managed portfolios, but none of them had heard of them or owned any of them.
7. Why do CEFs, Public REITs, and Master Limited Partnerships appear to be ignored by Wall Street, the media, and the majority of investment advisors?
Just like stocks, once they are “out there” in the market, all three of them make money and trade at a price that is solely based on supply and demand. Sadly, income programs have not received the same level of speculative enthusiasm and attention as other growth vehicles.
With a market value equal to NAV, income ETF and mutual fund shares can be created at any time. However, their product descriptions rarely mention income; Each only aims to raise the market value and achieve a “total return” that is comparable to the stock market.
An income purpose security could remain in the same price range for years and only provide 6 to 10 percent of one’s income to cover expenses like college, retirement, and international travel. However, income programs do not typically result in trips to the end of the year or six-figure bonuses; Instead, the annual “total return” of their portfolios or indices is used by the majority of investment advisors, ETF passivists, and mutual fund managers to determine their rating.
Before the dot.com bubble burst, my own “returns” of 10 to 15 percent from high-quality stocks and income producers couldn’t keep up with the speculative mania that drove the NASDAQ to 5000. This cost me a few jobs before the bubble burst. However, the operational credo of “no NASDAQ, no IPO, no mutual funds =’s no problem” resulted in significant growth and income during the 2000 market crash.
Another issue is that Wall Street firms’ broker/advisor compensation is entirely based on selling proprietary products and “investment committee” recommendations. There is no room for slow growth given the high-quality dividend-paying stocks and income-focused closed-end funds.
Finally, the government’s cost and market value performance myopia prevents CEFs from being included in 401(k) plans and other employer-sponsored investment programs. The Vanguard VTINX retirement fund pays less than 2% after a small fee; Hundreds of better-diversified CEFs pay 7% or better after fees of at least 2%. However, “retirement income programs” have been incorrectly referred to by the DOL, FINRA, and SEC as “retirement income programs.” You will never see a CEF, not even equity or balanced portfolio CEFs, in a 401(k) security selection menu. It is also unlikely that public REITs and MLPs will be present.
8. How many distinct varieties of CEFs exist; How much are they valuable to investors? In addition, are there any penalties for trading them frequently?
There are 131 equity funds in the United States, 306 taxable funds, 163 tax-free funds, and 204 other and non-US funds on CEFConnect.com.
The following are some examples of types and industries: Diversified national municipals, preferred stock, real estate, senior loans, sixteen distinct single state municipals, tax advantaged equities, utilities, emerging markets, biotech, commodities, convertible bonds, covered calls, energy, equity dividend, finance, general equity, government securities, health, high yield, limited duration bonds, MLP, mortgage bonds, multi-sector income, diversified national municipals, preferred stock, real estate, senior loans, sixteen distinct single state municipals, tax advantaged equities, and
CEFs can be purchased in the same way as individual stocks or exchange-traded funds (ETFs) and at the same price. They always pay more in income than their rival ETFs and mutual funds, and they are free to trade in managed, fee-only accounts. Selling them frequently incurs no additional costs, penalties, or fees.
9. What exactly are dividend reinvestment plans, or DRIPs?
There are at least four reasons why I don’t want to use DRIPs.
I don’t like the idea of adding positions above the initial cost basis.
I don’t like to buy things when there is a fake demand for them.
My preferred approach is to pool my monthly earnings and select opportunities for reinvestment that allow me to simultaneously reduce position cost basis and increase yield.
Investors rarely add to their portfolios in bear markets; when I need to have some leeway to add new positions.
10. Which aspects of income investing are the most important for investors to understand?
In point of fact, by concentrating solely on three things, an investor can become a successful income investor:
Interest rate change expectations are inversely correlated with income security prices (IRE). The amount and dependability of the income generated by income purpose securities must be taken into consideration when evaluating them. Market fluctuations rarely increase financial risk and have no effect on paid income.
Let’s say that thirty years ago, we put $10,000 into 400 shares of a P&G preferred stock with a 5.7% yield, a 2.2% 30-year Treasury note, and a par 4.5% IBM bond. The $1,240 in annual income has been accruing in cash.
Over the course of this time, interest rates have fluctuated between highs above 12% and lows around 2%. They have altered the course in fifteen significant ways. While the portfolio’s “working capital,” or cost basis of portfolio holdings, was growing every quarter, our three “fixed income” securities have seen their market values rise and fall dozens of times above and below their “cost basis.”
In addition, these securities’ “current yield” increased with each price drop, even though the dividend and interest payments remained the same.
So, when prices drop, why is Wall Street so uptight? Yes, and why?
Over time, we have earned dividends and interest worth $37,200; The preferred stock continues to pay $142.50 per quarter, and both the bond and the treasury note have reached $10,000 maturity.
We haven’t done anything to worry about changing market values, but our working capital has increased to $67,200 and our cash account has increased to $57,200 as a result. This is the essence of income investing, so comparing it to equity investing in this manner is absurd.
Investors must be reprogrammed to concentrate on income-generating income purpose investments and growth purpose securities with reasonable profits.
What would happen if quarterly earnings were invested in comparable securities? Or did you sell the securities when they increased by about 5% and put the proceeds back into portfolios of similar securities (CEFs) rather than individual entities in order to increase yield and diversify your portfolio?
With a $500 annual profit and an average interest rate of 5%, the portfolio’s “working capital” would rise to $168,700, or roughly 462%. $8,434 would be earned, a 680% increase. I sincerely hope that these conservative income figures will motivate you to incorporate serious income purpose allocations, particularly income CEFs, into your “eventually a retirement income portfolio.” Do not allow your advisor to persuade you otherwise; Stock market investments are not designed to consistently provide us with income in retirement.
CEFs are designed so that investors can invest in diversified fixed-income portfolios at rates that are higher than those of individual securities.
CEFs offer investors a one-of-a-kind, liquid entity that enables them to profit from price shifts in either direction brought about by IRE. Yes, that is what I intended to say.
11. Why take profits when a security’s income has not changed?
Compound interest is the “holy grail” of income investing. A profit of 5% that is received over several months will work much harder than a profit of 5% that is realized today and reinvested. When interest rates are rising as opposed to falling or remaining stable, profits can be made more effectively and profit opportunities are limited.
As a result, let’s say we have a CEF bond with a “limited duration” yield of 6%. We have held it for eight months and have already received 4.5 percent, so we can sell it today for a profit of 4%. So, in just eight months, we can earn a respectable 8.5% (actually slightly more since we have reinvested the previous earnings).
The money can then be used to look for a new CEF with a yield of at least 6%, with the intention of making a similar trade soon with another of our holdings.
A second reinvestment strategy is to add to a number of positions with yields that are higher than the CEF we just sold and priced below the current cost basis. This is an excellent strategy for increasing the “current yield” of existing positions and ensuring that you will have more opportunities to profit when interest rates fall.
12. How can the term “working capital” keep growing? Working capital will continue to expand as long as income from working capital exceeds portfolio withdrawals. Keep in mind that capital losses have no effect on income if the proceeds can be reinvested at a higher “current” yield, whereas working capital suffers a short-term hit.
Portfolios remain on their asset allocation “track” with each batch of monthly reinvestment decisions, but it is easier to guarantee steady growth in income and working capital with a larger income purpose “bucket.”
13. How prepared are you for retirement income?
the capacity to express this in clear terms: