More On The Income Generation Debacle

Income investors are having a hard time being able to generate enough dividends to support their needs as I wrote in “The Income Debacle” earlier this year.

Reader Ernest has those concerns as well, and he has this to say:

I have a substantial amount of my portfolio in cash M/M funds. I am stuck in stock funds with about a 25% position.

I am retired, age 71 and disabled and need more cash each month due to the debased dollar. I can get what I need from a yield of 5-6%.

The only place I can find such yields are in open end corporate bond funds. I would buy them but am concerned about getting out when inflation takes hold as I think it will.

I am looking at a 1/3 position in Vanguard short, intermediate and long term corporate bond funds.

I own a position in Harbor Bond and am considering Loomis Sayles (LSBRX) multi sector bond fund for about 10% of the portfolio and 10% in PFF I shares ETF holding preferred shares of financials as its yield is 9.7% fluctuating with the value of the underlying shares. The last 2 picks have taken a beating and nothing says they can’t go down more but if it is not an unreasonable risk I will take it as I need the cash and can wait for the NAV to recover someday.

Have you any suggestions? Am I trying to make something happen that the market simply will not support for long? I have looked at the Treasury ETFs on your selected bond investments and they simply don’t yield enough. I also think Treasuries are about as low as they can go so the total return will not be much more than the current yield.

As I previously said, I can’t see the sense in investing in a fund/ETF with a good dividend when, at the same time, you lose a much larger amount on the principal side. This is what has happened to all income funds this year; they simply got clobbered.

First, you are still having a 25% position in stock funds, and you claim that you are stuck with it. Why? There is no such thing as being stuck, since you can sell at anytime on the open market. If you were hanging on to those all year, then my guess is that you’re down by at least 40%.

If so, you need to stop the bleeding by having an exit point if the markets head further south. While there is no perfect solution, my suggestion has been to sell 50% and put a trailing sell stop of 5% under the balance.

Second, while looking to invest in high yielding funds/ETFs like PFF and LSBRX seems attractive, you can take that chance, but only if you’re willing to cut any losses short via a stop loss strategy. Working without one in this environment is asking for trouble.

Third, just because your needs are a yield of 5-6% does not mean the markets will oblige. To get that kind of return, you may need to take more risk that you would like. If I were 71 and disabled, I would not take that much of a chance.

You may not like it, but here’s what I would do. Until economic circumstances change, I would invest conservatively maybe in some non-volatile funds with a moderate yield and possibly some CDs. Say, on your entire portfolio this would give you an annual dividend of 3%, as an example. The difference of an additional 4% could come from you dipping into principal.

If you were to do that consistently, and nothing else, you’d be running out of money in 25 years when you will turn 96. Yes, I know it goes against conventional wisdom, but I am suggesting this approach for right now. If we return to a rip-roaring bull market, you can obviously make adjustments to increase your yield/capital gains.

Right now, don’t force the issue and don’t invest in anything without an exit strategy.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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