Income Investing Today -- book

[2B]

I recently read Income Investing Today by Richard Lehmann. He advocates a broadly diversified assortment of preferred stocks, REIT preferreds, convertible preferreds, royalty trusts and high dividend stocks. There are even mutual funds that try to track some of these indexes as well as the usual assortment of managed funds.

His basic conclusion is that he can achieve the return of a typical common stock portfolio with much lower volatility and risk.

I'd like to know if anyone is juicing their fixed income returns this way. There is market risk but they are paying significantly above current CD rates.

Is there a place for a 5% asset allocation in this area?

 

[brewer12345]

There is probably room for a 5% allocation to anything.

I have started doing this with my FI allocation. The credit market sell-off has made yields a LOT more juicy and you can now get an attractive yield even on pretty solid credits. But the ride is more bumpy with this approach vs. a bond index.

 

[megacorp-firee]

I recently read Income Investing Today by Richard Lehmann. He advocates a broadly diversified assortment of preferred stocks, REIT preferreds, convertible preferreds, royalty trusts and high dividend stocks. There are even mutual funds that try to track some of these indexes as well as the usual assortment of managed funds.

His basic conclusion is that he can achieve the return of a typical common stock portfolio with much lower volatility and risk.

I'd like to know if anyone is juicing their fixed income returns this way. There is market risk but they are paying significantly above current CD rates.

Is there a place for a 5% asset allocation in this area?

Yes, I am 'juicing' as you call it, my fixed income stream with preferreds, royalty trusts (Canadian oil), and muni's. You need to be doing this strictly for income reasons, as over the past few years, the value of these things rollercoasters. If you are a panicker, then this is not for you. You have to close your eyes to the day to day values and just say thank you for the monthly income stream. I get over 7.5% return (tax adjusted for muni's). But the ride can make you dizzy if you are the nervous type. It makes up about 25% of my portfolio and allows me to FIRE in a bit more comfort.

 

[2B]

Yes, I am 'juicing' as you call it, my fixed income stream with preferreds, royalty trusts (Canadian oil), and muni's. You need to be doing this strictly for income reasons, as over the past few years, the value of these things rollercoasters. If you are a panicker, then this is not for you. You have to close your eyes to the day to day values and just say thank you for the monthly income stream. I get over 7.5% return (tax adjusted for muni's). But the ride can make you dizzy if you are the nervous type. It makes up about 25% of my portfolio and allows me to FIRE in a bit more comfort.

You are a lot more aggressive in this approach than I intend to be. I was looking at 5% with the upside, if it proves to work well, of up to 10%. The reason for the 10% max is exactly what you say - volatility.

Do you primarily own individual issues or do you buy the funds? Analysis of the individual issues seems to require a lot of attention considering the possibility of changing credit ratings and the terms of individual issues. That could turn managing this "fixed income" asset class into a j*b.

The appeal to me is that a 5 to 10% allocation returning in the 8% range just about puts my fixed income at 100% of my midrange living expenses. My equities would generate 100% fun money. A significant loss in principle wouldn't be a significant factor (ouch!) as long as the income continues.

 

[megacorp-firee]

You are a lot more aggressive in this approach than I intend to be. I was looking at 5% with the upside, if it proves to work well, of up to 10%. The reason for the 10% max is exactly what you say - volatility.

Do you primarily own individual issues or do you buy the funds? Analysis of the individual issues seems to require a lot of attention considering the possibility of changing credit ratings and the terms of individual issues. That could turn managing this "fixed income" asset class into a j*b.

The appeal to me is that a 5 to 10% allocation returning in the 8% range just about puts my fixed income at 100% of my midrange living expenses. My equities would generate 100% fun money. A significant loss in principle wouldn't be a significant factor (ouch!) as long as the income continues.

You are correct, this could turn into a j*b. That is why I found a FA that charges me $1000/yr to help me find appropriate vehicles for my income side of the portfolio (as well as give me a yearly health check on the entire portfolio). They are individual issues, which the FA put me into. I paid no loads, I paid his firm a transaction fee which is a bit more than the big discounters. But since I am buying and holding, I kinda don't care. This is going into year 4 of this arrangement and I am happy.

The other side of my portfolio are 401k 'proprietary' (I don't know what else to call them) index funds (equities, bonds, reits) from megacorp and some taxable index ETFs, and cds and mm.

So the cd's, mm, and my 'income portfolio', along with my pension feed my day to day habits. My equities will be used to replenish my cd's, mm's. I do not touch the preferreds, muni's, and royalty trusts unless my FA tells me that something went south and we need to make an adjustment. So far no changes (if you are one that is concerned about churning).

As I said, if you are a 'tinkerer' and you won't be able to keep you hands off when your preferreds, reit's, and royalty trusts go down in value, then you probably shouldn't get into them. If you are using them to provide an income stream only, then you can do this. If your 10% allocation will give you 100% income target, then go for it. Since, like me you aren't (overly) concerned about losing some value from time to time, then I believe this strategy may be for you too.

Best of luck to you.

 

[2B]

Lehmann has a newsletter that I think is $195 per year. I looked at a sample and it has all sorts of details on individual recommendations. There are also various "portfolios" that are directed towards conservative, moderate and aggressive income investors.

I plan on looking at the performance of his recommendations from the sample newsletter dated August 2007. That should really show how wild the ride can be.