It constantly amazes me to read about towns struggling in America, I am equally surprised that the United States has long been in financial distress. An income strategy, implemented within the past 50 years, had the potential to prevent this distress. Small towns, struggling with financial problems, could have had treasuries maturing annually, and cash rolling in every 6 months (from corporate bonds) however, this seems not to be the case. Whether you manage a big city, a small town, or a household it is never too late to construct an income stream, that has the potential to become a river of income.
Most of you have seen billboards, and websites with the national debt; which currently stands at $16T. The total US debt (including household, financial institution, local and federal) is over $58T with US unfunded liabilities (including social security, prescription drugs & medicare) of $122T. The total liability per taxpayer is currently an astounding $1,085,751. US federal tax revenue currently stands at $2.4T, made up of $1.1T in income tax, $859B payroll tax and $243B in corporate tax. The average American household savings account balance is $3,800. Approximately 25% of Americans have no savings at all.
Washington D.C. based Brookings’ economic studies co-director, Karen Dynan, wrote a fascinating article last October, “Higher Personal Savings: Who Needs It?”
“Over the near future, there is a downside to higher personal saving. Saving more means spending less, and, with consumer demand accounting for such an important part of the U.S. economy, the economic recovery will not be as strong as it otherwise would be…
As part of the coming fiscal negotiations, we should consider ways in which policy might encourage saving by households over the longer run.“
Ms. Dynan of course realizes that without savings there would be less spending in the long-term. A basic financial strategy of income generation has the goal of saving and spending in mind. When people save they don’t place their money in their mattress, they have the ability to invest in products that will hopefully make more money. The problem is there are plenty of bad investments out there.
When you earn $100 do you immediately think of how it could be spent, what it could go to pay back; or do you think about what it could be in 10 years, 20 years and so on? Potentially $100, properly invested could become far more, or it could disappear, whether spent, or saved.
For instance I invested in a single company last year that an author had proclaimed would “double.” I put about $100 in it, and it is now worth about a dollar. That was disappointing, the following month I added another $100, and having learned my lesson went into a fund with exposure to many companies.
Though an income fund or closed end fund could lose money, just like a failed company; a variety of different funds, managed by a variety of different fund families, works to insulate potential risk. These funds hold bonds and some also hold stocks. The bonds generate cash that the funds can use to pay dividends to shareholders. Those dividends can either be reinvested or paid in cash. Additionally investors can allocate some to funds that trade at a discount to their net asset value (NAV) and some that trade at premiums to their NAV.
Here I will form an example for a small savings account, less than the average household savings. Primarily because, as you’ve read, 25% of Americans on average do not even have savings. I will show possibilities for a few grades of savings accounts here:
|portfolio size||high yield income fund||utility income fund||emerging markets income fund||dividend stock income fund||total / %|
|$500||$75||$75||$75||$75||$300 / 60%|
|$2,500||$250||$250||$250||$250||$1,000 / 40%|
|$3,500||$350||$350||$350||$350||$1,400 / 40%|
|$5,000||$500||$500||$500||$500||$2,000 / 40%|
Keep in mind the dividend stock income fund would provide exposure to equity. The smallest portfolio allocates more, because commissions could be a factor; though several brokerages offer commission-free ETFs (some of the funds in the example below are ETFs [exchange-traded funds] while some are CEFs [closed end funds].) For the smallest portfolios, investors need to be mindful of commission costs.
Some examples of funds are as follows:
|high yield income fund||HYB: The New America High Income Fund
HYT: BlackRock Corp. High Yield Fund VI
HIS: BlackRock High Income Shares
|utility income fund||ERH: Wells Fargo Adv. Utilities & High Income Fund
DPG: Duff & Phelps Global Utility Income Fund
UTG: Reaves Utility Income Fund
|emerging markets income fund||EBND: SPDR Barclays Capital EM Local Bond ETF
PCY: PowerShares Emerging Mkts Sovereign Debt
LEMB: iShares Emerging Markets Local Cur Bond
|dividend stock income fund||VIG: Vanguard Dividend Appreciation ETF
DVY: iShares Dow Jones Select Dividend Index
GDV: Gabelli Dividend & Income Trust
When an initial position or group of funds are acquired, it is important to plan to add, subtract, or diversify, as necessary over time. The funds shown in this example generate taxable income, unlike tax-exempt muni-funds. Though the small amounts covered in this example would not produce a sizable tax burden annually.
An important factor in this strategy is the portfolio should not be stationary. Currently the stock market is high (some say artificially so,) and interest rates are low; respected institutions are warning of a bond bubble. Still it is not possible to definitively gauge fluctuations; these funds could weaken or fail, however, hopefully you get the points of diversification and allocation. Over time the number of investments could increase, with an emphasis on quality and capital preservation.
If you have any comments on this strategy, or any of the income & equity funds, please leave a comment below.
Disclaimer: This article is not a recommendation to buy or sell, please consult a financial adviser to determine proper allocations (if any) to meet your financial objectives. I am long HYB, HYT, HIS, ERH and GDV. I am considering EBND, PCY, LEMB and VIG.