7/7/2011 5:16 PM ET|
4 investments for generating income
Locking in a steady income stream is as hard as it's ever been. But it's not impossible. Here are strategies to consider.
Hunting for a safe, decent yield these days is a lot like looking for the perfect house: Even if you find it, you start worrying right away that it may lose its value.
Just look at what's happening in the neighborhood. Banks are offering less than 1% if you give them your money for a year. Hand it to the U.S. government for a 10-year bond, that bedrock of safety, and you'll get less than 3%.
And that's not the half of it. When the rock-bottom interest rates start to rise -- and they eventually will -- the value of your fixed-income investment could take a tumble as the return starts to look paltry.
This bind comes just as income has emerged as the top priority for more investors than ever.
"My clients are talking about it all the time," says Maureen Raihle, managing director in Chicago for Merrill Lynch's Private Banking and Investment Group.
No wonder: Some 40 million Americans are already over 65, and another 40 million are between 50 and 60. Everyone, it seems, is either retirement age or headed there -- and they all need income.
In fact, income generation in retirement was cited as more important than any other financial goal by nearly 80% of investors surveyed last summer by Allianz Global Investors.
So what should you do?
The classic solution is laddering -- buying bonds or CDs that mature at staggered intervals, such as every six months, once a year and every two years. Holding these short-term and longer-term bonds decreases interest rate risk by spreading it along maturities. If rates are rising, for example, as one bond matures the funds can be reinvested into higher-yield bonds.
But right now there's a big problem with laddering. Meg Green, chief executive of Meg Green & Associates in Miami, points out that rates are so low "you're not getting anything on the short end and are left with no income for the first few years."
But there are other options if you're willing to take on some risk.
Some big consumer-staples companies are offering attractive dividend yields, such as Coca-Cola (KO, news) (its shares yield 2.8%), General Mills (GIS, news)(yielding 3.3%), Johnson & Johnson (JNJ, news) (yielding 3.4%) and Procter & Gamble (PG, news) (yielding 3.3%).
While the yields will decline when the stocks strengthen, you could end up with some nice capital appreciation.
You can also play dividends through mutual funds. Carrie Coghill, chief executive of Coghill Investment Strategies in Pittsburgh, likes the Federated Strategic Value Dividend (SVAAX) fund, now yielding about 3.3%. It has the benefit of geographic diversification, with exposure to both U.S. and overseas companies.
High-yield bonds, commonly known as junk bonds, sport yields that are more attractive than those of Treasurys -- right now, their yields are about 4 percentage points higher.
There's always the risk of default, but the default rate has fallen sharply, to 2.6% in April from a high of 14.5% in 2009, according to Moody's.
And credit quality could strengthen further in a rising-rate environment, because the first leg higher in Treasury yields usually corresponds with a pickup in the economy. That, in turn, benefits the companies that have issued the bonds.
One other risk: Trading can be relatively illiquid, making it tricky to exit.
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I agree with Jack (see below). I am in my early 40's and I have taken advantage of the housing crisis. I found a nice rental house between a Military Base (for Officers) and a Mid sized college (for professors) in central Missouri. Remember location, location, because the Base and the College aren't going anywhere. The housing crisis is working for me! I bought the house at a great price and no one wants to buy right now, so they are renting. This makes nice rentals renting at premium rates. I pay $50 a month for a property manager to handle it, because i live in Florida. Originally we were thinking of selling the house when the market goes back up, but with the money coming in we might keep it long term. So I get paid now and if we sell the house in a better market. Here in Florida I own a mobile home park (lots only) mostly for retirees (not a trash park). Owning a mobile home park sounds trashy, but it is almost all profit and has very, very little overhead. My wife is embarrassed of owning a trailer park, but she quickly forgets about it on rent payment days.
I am getting great returns and have options to sell them if it doesn't work out. By the way, I would sell it by owner and owner financed, so again it is a win win situation. Plus if they default on the loan, the property comes back to me to sell again.
Let us get real here: Why is it that no one ever talks about the inflation loss--not ever--, it must be a dirty word!
The inflation for me for 40 years have been 465 %, (look it up at US Inflation Rates by year, yes, it is actually right there for you to see) so I do not care if I get 1 % or 5 % that still does not get me the same money value (buying power) I had say if I put 10,000 in the bank 40 years ago (a Volkswagen beetle cost at that time 1,998 Dollars), that 10 K money is now just 2,200 in value if one only gets 1 % (on which you have to pay taxes), that is only 11-12 % per decade, that means only at 1 % rate is only a total of about 50 % compounded at best for that same 40 years, so why is it that Investment bankers do not tell anyone the truth, you loose money always in regular investment, and banks. The stock market can gain 30 % in one year, but so far it has lost 50 % just since 2001, look at DJ is about the same, and that means that money now is only half the value--try to go and buy something, and you will find out!--DJ should have been about 24,000 now to be a basic investment.
The first sentence in this article is misleading when combined with the content of this article. "Hunting for a safe, decent yield~~~. Not one of the recommendations within this article are "safe"
In your article you state that " income generation in retirement was cited as more important than any other financial goal by nearly 80% of investors surveyed" yet a contributor to the article shares that " While the yields will decline when the stocks strengthen, you could end up with some nice capital appreciation." Retirees are not looking for capital appreciation during their retirement phase, they want to know that their income is stable for the future.
Money has three phases during ones lifetime- Accumulation, Distribution & Preservation. When will Wallstreet get it right...You cannot use accumulation strategies during one's distribution phase of their lifetime, if you do you will most likely negatively impact their hopes and dreams for their future.
In the midst of all of this, their lives will never be the same and tomorrow you will provide more "opinions" that will mislead people once again. If you want to "Win" financially, stop listening to any BUZZ from Wallstreet. Furthermore, to get a better understanding of the motives behind Wallstreet and various firms within this industry, read a book by Attorney, Dan Solin-Does Your Broker Owe You Money?
And finally, it is paramount that one determine the "how & why". "Is a recommendation getting you closer to your goals or further away".
Best of Life
Very disappointing article. Who writes this stuff? No mention of REITS. Preferred stocks. You trash 10 yr US treasuries as yielding less than 3% and then give us a host of blue chips
yielding less than 4% saying they might go up in price. i held JNJ for several years and the stock price did nothing. Still has done virtually nothing since I sold it. As one other commenter has said the title of the article is how to generate income, not "hope" for capital appreciation.
They are not real high yielders now, but i would have thought annuities would have been mentioned as a safe source of income for retirees? Personally I have moved to a 50/50 stock/bonds allocation as I near retirement. Some low cost bond funds (corporate in my IRA
tax exempt in my taxable acct.) but also Individual intermediate/long term bonds purchased at par and some preferred stocks yielding 6-7.5%. Nearly all the bonds have appreciated in value, but I will hold them to maturity and live off the income in a few years when I retire.
Right now everything is risk that involves return on credit and even dollars. Nothing has changed since the 07-08 meltdown in the credit markets if anything its worse because government has bailed out Wall Street and taken the toxic debt on themselves, The ensuing high employment and low tax revenue is now causing government to go belly up. And in the immortal words of Bush appointed Ben Bernanke ," Gold is not money". To clear this mess up and legitimize Wall Street for the common folk will take politicians that simply we do not have and an electorate which we do not have. We need a strong dollar policy and full employment and people with money will once again be able to get decent returns with low risk.Good luck on that.
The yield on the stocks already in your portfolio does NOT decline because of stock price appreciation. Unless the dividend payout is cut/changed, you continue to receive the same yield until you sell the stock.
Wish there was a recommendation, I could make to my fellow posters. But will write this, all the investments, talked about in the article, a person can and probably will, face a loss of principle on there investments, even the bond funds.
Real estate, while it traditionally has been a good investment, prices can continue to deteriorate, and if we end up in a full blown depression, no one will be able to afford to rent. Plus real estate, is not suited for a lot of retirees, that want to travel, and do not want the headache of being called all hours, by tenants with complaints.
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