What are your thoughts on Income Funds?

[UpQuark]

What are the pros and cons of 'Income Fund' mutual funds? I had arranged a lot of 'dry powder' hoping to get 20 yr bonds at 5% (or better) but currently it looks like maybe they will only pay 4% coupons (I'm really confused about what affects the coupon rates of the long duration bonds, so I'm not sure if I should wait and hope those go up again).

I'm wondering if Income Funds are a way to get a dependable income without losing control of the money, or if annuities are better, or if maybe I should increase the equity portion of my AA. Right now it is 57/43, but a huge portion of the 43% is just sitting in MM.

My parents had income funds (I know because after they died I inherited them), but they used Edward Jones and I don't know if that means their money was invested in the way that was most profitable to their financial advisor, or whether Income Funds were an okay way to invest.

 

[imbatman]

Hmmm, lots of wiggle room in how to answer various topics there. Just take this as an opinion from a random internet person

1) I don't think rates will be going up substantially any time soon. Still rates are high (one can never time buying at the top....go look at a 10-year corporate bond rate chart).
2) I am not sure what an "income fund" would be exactly as you can generate income from many sources, as you noted. Do you want stocks (US or Global?), dividend income, preferred stock income, bond income? Taxable or not? The first thing that comes to mind for me for a taxable income source is DODIX mutual fund, which has no equity and yielding somewhere between 4-5% today.
3) You could definitely get some "safer" high income equity exposure via an ETF, of which JEPI would come to mind for me. Due to construction won't rise as high as stock index fund, but it won't fall as much either and is throwing off around 8% distribution today.
4) 43% seems like a lot in the MM because those rates are heading down sometime next year and the longer you wait, the less likely you will find replaceable low-risk yield (if that is the reason you are there).

Anyhow, just some random thoughts for you to chew on, others may have more comprehensive feedback. Cheers!

 

[triangle]

I have had a couple of small positions in income funds based on bonds and other debt securities over the last decade. I have never deeply understood how they operated day to day, but the main concern I found with these funds is leverage. Usually the higher the payout, the higher the leverage which can work well for years but usually bites at some point in the economic cycle. Also many funds are so strongly committed to delivering the stated income payout that they will dip into principal and pay back some of the original capital (return of capital - ROC) if necessary, which will lower the fund's NAV and trading price. That operation makes sense for someone who relies on that fixed payment to fund their monthly living expenses but not for someone who is trying to be more conservative with their investment.



Some commentary yesterday about interest rates from a bond/income manager. Not sure how to make it actionable but maybe it is interesting to some.

 

[mrfeh]

What are the pros and cons of 'Income Fund' mutual funds? I had arranged a lot of 'dry powder' hoping to get 20 yr bonds at 5% (or better) but currently it looks like maybe they will only pay 4% coupons (I'm really confused about what affects the coupon rates of the long duration bonds, so I'm not sure if I should wait and hope those go up again).

I'm wondering if Income Funds are a way to get a dependable income without losing control of the money, or if annuities are better, or if maybe I should increase the equity portion of my AA. Right now it is 57/43, but a huge portion of the 43% is just sitting in MM.

My parents had income funds (I know because after they died I inherited them), but they used Edward Jones and I don't know if that means their money was invested in the way that was most profitable to their financial advisor, or whether Income Funds were an okay way to invest.

Sounds like you are relatively new to investing. I suggest you read this:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

My suggestions: a) stop timing the market and b) focus on total return, not income.

 

[athena53]

I'd stay away form annuities- too many moving parts and a generous commission paid up front to the seller, so less money at work for you.

I have bond funds but the problem I have with them is that the values fluctuate with market interest rates- as you've probably noticed, fund values go up when interest rates decrease and vice versa. The effect is magnified for longer-term bonds. If fund holders want to sell at the bottom, the fund company has to sell bonds to pay those who exit, thus making the losses realized. You have no control over this.

I've got a Separately Managed municipal bond account with UBS and have been very happy with it. They buy and hold bonds in my name and generally don't sell unless they think the risk of default has increased, which rarely happens. I just let the interest accumulate. It sounds like you're looking for a steady income stream, though, so this may not be what you want.

 

[EastWest Gal]

I think the terminology refers to stock funds. Some mutual funds and ETFs might be labelled "growth" or "income". The stocks in the growth funds throw off less dividends and focus on growth in value, and the ones in the income funds pay more dividends. Dividend payments can reduce the growth potential, though, and there are advantages to both.

Examples of stocks you might see in a growth fund: Google, Apple. Google doesn't pay dividends; Apple's dividend yield is 0.48%

Examples of stocks you might see in an income fund: Chevron and Exxon. In its entire history, Chevron has never reduced its dividend payments to stockholders. Its current dividend yield is about 4%. Exxon is similar, at about 3.5%

Federal tax treatment of LTCG and dividends is similar. But if you are living off your portfolio, an advantage of growth funds is that when you sell equities for cash, you get more cash than income. If a fund has a cost basis of 50% of its current value and you sell $10,000 worth of that fund, you get $10,000 cash, but only $5,000 is reported as income, and all of that is in LTCG which significantly lowers your tax bill. Dividend income is dividend income, whether you use the cash or reinvest it.

This is a huge advantage of growth funds. They are excellent for a buy and hold strategy. And at tax time, I'm happy. It also keeps our income significantly lower for ACA purposes. I'm a fan of these, especially if you have time to let them grow.

 

[TheWizard]

Yes, it's better to invest for higher Total Return as opposed to dividend-focused funds, which often have lower TR.

If the OP tells us which income funds he/she inherited, we can analyze their Total Return...

 

[target2019]

First, we should define income fund.

 

[Montecfo]

Sounds like you are relatively new to investing. I suggest you read this:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

My suggestions: a) stop timing the market and b) focus on total return, not income.

I agree with total return. And I think laddering bonds makes a lot of sense.

But I disagree with the "stop timing he market". I believe at major inflection points it is possible, even probable to time the bond market effectively.

For Bogle followers this is blasphemy of course. But stocks and bonds are very different markets.

 

[Chuckanut]

I own some Wellesley income fund. Since it is 2/3 in bonds, many of them long term, it took a big hit as interest rates went up in 2022 and 2023. I have held it through all of this. In hind-site I should have sold it when I bailed out of the medium and long term bonds funds several years ago, when rates were so low that some banks were paying negative interest.

However, now that the FED has hinted it might start lowering interest rates next year, selling now would be a bad idea. After a few rate reductions we should see some bounce back in the share price. In the meantime I have been reinvesting dividends in shares bought much lower than before. I am leaning towards selling it as rates fall so as to simplify my investments. But, that could change.

Note: I can afford to be rather casual about Wellesley’s performance since my stock index funds, CDs, and bonds have done so well this year. And, it makes up a rather small part of my portfolio.

 

[Rianne]

OP, you asked about income. I've set up an income stream into our settlement account based on CDs and treasuries paying 4.3+ interest. Now I'm thinking of going longer term than 5 years and a VG bond desk agent suggested agencies. I'm not well versed on these, but some pay 5%+ coupons over a long period. I've seen some go out 30+ years in AAA-rated government agencies. I would get in touch with your broker or someone holding your funds and ask about these. Agencies are supposed to be safe as they're govt. backed BUT there is always a risk. (2008)

 

[imbatman]

Agencies are great and most are exempt from state/ local tax....but I can't remember the last time I saw any without call dates in the next 9-months, I think I might have seen a few 3-5 year call dated last year.