Hi - I honestly can't think of any more educated an unbiased people to ask this question to than the good folks here at MFO.
A neighbor of mine is thinking of putting money into income producing investments. I'd guess that he's in his early to mid 50's and is confined to a wheelchair due to fibromyalgia (hope I spelled that right!). He's getting some social security disability payments and is living with his parents. I don't know what his current portfolio looks like. He'll inherit some money and the house when his parents pass away, although I don't know what those figures will be. He doesn't want to consult with a broker like Fidelity and the others as he seems to have had a bad experience with at least one of these firms and simply doesn't trust them.
He asked me if I could suggest income producing investments and all I could think of were Vanguard Wellington, Vanguard Wellesley and Matthews Asia Growth & Income (VWELX, VWINX and MACSX). I've focused more on capital appreciation with my portfolio although it wouldn't be a bad idea for me to consider income producing investments also. I'm now at the ripe-old age of 35. I know, geezer city! : )
Thanks in advance for any and all suggestions!
Comments
Regards,
Ted
https://investor.vanguard.com/mutual-funds/profile/VTHRX
https://www.morningstar.com/funds/xnas/ptiax/quote.html
CM for quarterlies. (CIBC, Canadian Imperial Bank of Commerce, can be bought on NYSE.) Today, Morningstar shows CM is selling at a -16% discount. The yield is 5.05%. It's one of the huge 6 Canadian banks which hold 90% of retail deposits in Canada. The banks up there are highly regulated. Customer service sucks, but the banks are financially solid.
https://www.morningstar.com/stocks/xnys/cm/quote.html
Your neighbor is in a different situation. It sounds like he's looking for immediate income for now. One way to increase current income is to invest in closed end funds. This isn't my strong suit (I invest for total return, focus on long term, etc.), so I'll just offer general comments here.
CEFs boost income in two ways. One is that they normally trade at a discount to NAV. Say there's a 5% discount on a fund with bonds paying 4%. Instead of paying $100 for $4/year, you pay only $95 for $4/year. That boosts your payout to 4.21%.
What matters here is not only the discount but the trend of the discount. If a given fund always sells at a discount to NAV (say between 5% and 10%) and you're buying it when it is selling at a 5% discount, it's likely that when you sell, it will be even cheaper and you'll lose some principal. So that's one thing to watch out for. (Z-scores can help here.)
A second way that CEFs boost income is with leverage. Like a bank they borrow money, paying out a certain rate of interest to the lenders, and using that money to buy bonds paying even more. If they can, they (and you) win. If they wind up having to pay more on the borrowed money than they can make, they (and you) lose.
I did a little searching using the engine on CEFConnect (free registration required). Nice tool, but one needs to have a sense of what to look for. It's just not in my range of experience. Perhaps someone else here can suggest specific CEFs.
https://www.cefconnect.com/closed-end-funds-screener
Thanks for your explanation of CEF's. I understand your explanation and look forward to learning more about CEF's. I honestly don't know what my neighbor intends to do, although I do know that some current income is a definite priority for him. I'll pass on your CEF suggestion for him to think about. Thanks again!!
Funds mentioned above, chart:
Not knowing if the potential investment is a taxable account, tax efficiency may be a consideration.
https://seekingalpha.com/article/4247709-need-income-retirement-investments-want-growth?isDirectRoadblock=false
Iusb - cheap bond ETF for retirement investors
Thanks to everyone who looked at this thread and took the time to add their suggestions : )
I forgot about lsbrx for income... Several mfo members owed this fund before, I have it since 2012..good reasonable fund to have for nice monthly income
Just some personalize thoughts being in market for 12 yrs now :
I do hold fidelity total bond market Fbnd and Phk in mom portfolios she is few months from retirement plannings
In my acct I have bnd - Vanguard total bond market
At 35 yo I would do 80 to 90% stocks portfolio in my holdings to reap most rewarding to long terms investments lol... You still have a long way to go +35 or 40yrs until retirement ... I would not change nor touch portfolio too much maybe once every few yrs.. Being couched and iddle maybe best for you and invest more in indexes stocks.. At least this is what buffet and boggle keep on preachings for many years
For my tsp 401k I have 80/20 since started investing in 2007 (right before the largest crash in modern time),,, have not changed portfolio much since 2007 and I am doing very well with those positions and holdings... Currently still >80%stocks <20%bonds
For 401k-tsp biggest holdings
Indexes from tsp 80% large cap mid cap small cap and em divided evenly
10% 2040 maturity fund Tdf
10% G bond
Brk.b another large holdings
Vgstx
Vppcm Vanguard prime cap
Another thing if you have 1099 return forms (most investment company have these for their portfolio for tax purposes if you have div incomes from bonds or MF ETFs)
you maybe able qualified to open sep-ira acct, we have this since few yrs now, this acct works exactly as regular-Ira but you can put in 20%of your income and maxed out at 55k annually... the best thing is you can have this along w tsp(private 401k if working for govt) and regular 401k. You may save lots tax money once able to retired many yrs from Now and just let those money grow taxed free... Just do research and ask ur cpa at your institution before starting... I highly recommend having Sep-ira + roth Ira... We saved so much in taxation $$ past 3 yrs now
Good luck
- one gets 1099-DIVs from closed end funds as well as from mutual funds and from stocks
- one gets 1099-INTs from bonds, because they pay interest, not dividends
- 1099-MISC income (e.g. for independent contractors) can usually fund SEP IRAs
It is your employer, not you, who funds a SEP-IRA. To put it another way, for you to be able to contribute to a SEP, you must be your own employer (i.e. self-employed). This is different from a 401(k) where you (as employee) contribute. Though the employer may also contribute via matching or profit sharing.
If you (as the employer) have multiple employees, you must fund everyone's SEP. That can be a strong disincentive to using SEPs.
Another way for your business to save "so much in taxation" is with the new 20% deduction on qualified business income (QBI). Though there's a laundry list of service businesses that don't qualify, e.g. law and accounting. On the other hand, architects and engineers get special treatment. "Just do research and ask ur cpa"
DB plans can be very useful for tax purposes, generally for high earners over age 50. The reason for that age is that since these are pension plans, the value of the plan at retirement must be enough to sustain the promised pension. The fewer the years until retirement, the more you can/must put into the plan annually to build up to that value. If you've got many years until retirement, you may find the amount you're allowed to contribute limited (since there's a cap on how large your pension can be).
A couple of caveats excerpted from the first Schwab page:
- Contributions are generally required annually, and this plan is suited for someone who can contribute $80,000 or more for several years. Note: Contributions are not discretionary—you must make the annual required contributions needed to properly fund the plan.
- [D]ue to the permanency requirement, the IRS could disqualify the plan if it is terminated in less than five years
https://www.schwab.com/public/file/P-1604569/SLS25840-05-ST.pdfQ&A Guide: https://www.schwab.com/public/file/P-1604574/MKT35488_WB.pdf
FAQs:
https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/personal_defined_benefit_plan/personal_defined_benefit_plan_faqs
Schwab plan/setup/costs:
https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/personal_defined_benefit_plan (multiple tabs)
A plain English article from the NYTimes with its own set of benefits and risks. In addition to the caveats above, it points out that because defined benefit plans are pension plans, they (like state pension plans) may be required to add extra money beyond what they planned for if the investments don't perform as well as expected. (Amounts in article are from 2012.)
https://www.nytimes.com/2012/12/01/your-money/defined-benefit-plans-allow-fast-retirement-saving-but-with-risks.html