In the first three parts of my series on income investing, I discussed what exactly income investing is, how common stocks and traditional bonds can play a role in the income investor’s portfolio, and certain things on the macro front that income-focused investors should keep an eye on. It is now time to look beyond common stocks and traditional bonds, and wrap up this series by discussing other income opportunities investors may want to consider for their portfolios.
Sitting just above common stocks on the capital structure are preferred stocks. Preferred stocks are a hybrid-type security with features similar to both common stocks and bonds. Investors looking for higher yields than the common stock and bonds of a particular company pay often find those yields in preferreds. Every public company does not offer preferred stock, so your options are somewhat limited. But many REITs, utilities, and financials do. For investors looking to build annuity-like income streams, the yields offered by many preferreds can be quite enticing.
In a recent article, “Exchange-Traded Debt – A Different Breed of Bonds,” I noted several features of exchange-traded debt that makes it unique. Unlike traditional bonds, debt traded on an exchange does not have to be purchased in increments of $1,000, and there are no minimum purchase requirements. On the other hand, exchange-traded debt usually has very long-dated maturities and call features that are less favorable than more traditional bonds’. Additionally, exchange-traded debt is further up the capital structure than preferred stock and pays yields that are generally in line with what one would expect from preferreds. Again, investors looking to build annuity-like income streams without needing to touch their principal often can find attractive opportunities in the exchange-traded debt space.
Despite their reputation for being inherently risky products, there are certain options strategies that are suitable for most investors and help enhance a portfolio’s income-generating capabilities. Two such strategies are selling puts and selling covered calls. By using these strategies to methodically collect small amounts of income on a regular basis over extended periods of time, you can increase your portfolio’s income stream in a meaningful way. If you want to learn more about options, including selling puts, selling covered calls, and other strategies, you can do so in my book, Options Strategies Every Investor Should Know.
The illiquidity, leverage, and generally high minimum investments often required for physical real estate investing keeps many people from acquiring portfolios of properties in their lifetimes. If you are one of the fortunate ones, you can certainly collect steady cash flows from rental income. For everyone else, there is always REITs. Regarding equity REITs, investors have plenty of choices in which to invest. This includes both common stocks and preferred stocks. If you are an income investor and someone interested in protecting purchasing power over time, it may behoove you to have exposure to the real estate cash flows of a variety of public REITs.
If your investment focus involves creating diversified streams of income with as little risk to principal as you feel is possible in order to sustain your purchasing power over time, then Income Investing Insider is for you. The newsletter will include a monthly macro discussion and my views of the current investing environment. It will also include ideas of various securities that might serve the income-focused investor well. Those securities will come from across the broad spectrum of assets discussed in this four-part series on income investing.
If you are serious about income investing and interested in subscribing to Income Investing Insider, you can do so here.
More from The Financial Lexicon:
The 5 Fundamentals of Building a Retirement Portfolio