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Income Investing in a Rising Rate Environment

Take a longer look at bonds before exiting your position

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Strategies for Retail Investors

But you’re not Bill Gross. So short of investing in Gross’ funds – about which we have no opinion, one way or another – where else can you turn to generate income? Here are some promising ideas:

Real estate. A long-term, proven income generator over time, real estate has the additional advantage of leverage. There are still bargains to be had out there, too, though a year long broad recovery in house prices, plus the infusion of billions from hedge funds into the rental property market has made bargains somewhat harder to find than they were a year or two ago.

REITs and REIT Funds. These investment vehicles invest in real estate, but are taxed to incentivize them to pass on income to the investor in the form of dividends. You can buy REIT funds, or buy individual REITs that concentrate in specific industries like large residential developments, apartments, condos, malls, hotels, specific regions and states, and divide the risk any way you can imagine.

You can dial risk up or down, generally, by investing in more or less diversified REITs or combining them. You can even buy untraded REITs to boost yield on your investment, but this is for experienced hands only.

Lifetime Income Annuities. These are insurance products that convert a lump sum to a guaranteed lifetime income. However, depending on your age, the actual yield you get each month or each year can get a significant boost over and above market rates because of a phenomenon known as mortality credits. The older you are when you buy an LIA, the greater the effect. This is most beneficial for those in good health.

Medically-Underwritten Annuities. Are you in poor health? Still need income? The medically underwritten annuity is a little-understood product designed to serve this market. While conventional LIAs benefit the healthy, these annuities provide a payout based on the mortality rates of people who share your less-than perfect medical condition and overall health. This is one way to boost income on a lump sum.

Utility Stocks. Long favored by your grandparents, utility stocks are still generating income based on subscriptions or power usage. A number of them have a long history of generating reasonable dividend income. In some cases, we’re seeing cell phone companies and broadband companies take on utility-like characteristics, at least as far as investors are concerned.

Municipal Bonds.  Yes, some municipal bonds will have difficulties, and there will be more municipal bankruptcies. But the vast majority of them will pay income and principal as scheduled. For those in higher tax brackets, the fact that these bonds are generally tax-free (with the exception of private activity bonds for those subject to the alternative income tax) provides a nice little yield-boost – with no corresponding increase in risk, in many cases.

Covered Calls. When you sell a ‘call’ option, you are selling other investors the right to buy a stock from you – at a higher price than it’s at now, usually. The call is “covered” if you actually own the stock. That means there’s no risk you’ll have to go out and buy it yourself to sell it to them when it comes time to deliver. Other investors are willing to pay for the right to buy a stock at a certain price. Your portfolio can potentially generate a few points of income this way. Often the option will expire, and you just keep the money. Sometimes you’ll have to sell the stock. No problem – take that money and put it in some other bargain!



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