August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to...

12
headlines saves little principal but frequently costs essential investment income. That’s have money earmarked for a purpose with a nearing deadline, such as buying a vacation home this winter, you shouldn’t take much risk with it. But when you need investment income to supplement your cash flow, there are far, far better options that pay well, are fully liquid, and are not restricted to extremely wealthy or institutional investors. The following core principles are serving you well in 2017, as they have in previous years. Cash flow is king. The golden rule of income investing is to be sure that you will get paid. Sure, a company might be unable to sustain its dividends if it reports a loss or an energy partnership could slash its payout because of turbulent oil and gas markets. But enterprises whose primary appeal Timeless Tips for Successful Income Investing why the best bond portfolio managers do not trade on day- to-day interest-rate forecasts and movements. It’s also why Kiplinger’s Investing for Income takes a long view and rarely replaces the names or the sectors in our interest-and-dividend- oriented model portfolios. Despite persistent low yields, we are not opposed to money- market funds, bank deposits and short-term Treasury debt. If you The golden rule of income investing is to be sure that you will get paid. continued on next page ... Yieldcos Power Up With a Second Wind 3 These high-paying investments in alternative energy generation are coming into their own. Standing Ovation for the Green Swans 4 How’s our low-risk, high-dividend stock portfolio faring? Very well, and we’re happy to tell you why. Timely Tactic of the Month 4 Yields are looking good on two- and three-year corporate notes. Kiplinger’s 25 for Income 5 A strong month, led by utilities and real estate. One member hits a four-year high. Ask Jeff 6 Questions about ETFs, a shopping-center REIT, Annaly preferred shares, and the relationship of junk bonds to stock prices. What’s New in Cash 7 Los Angeles gets upgraded while Standard & Poor’s keeps the Treasury’s rating down. And the return of non-traded REITs. Rates and Yields 7 Model Portfolios 8 The latest on our four rotating models: Dividend-A-Month, Juiced-Up Cash, Going for the Max, and Tax-Exempt Income. Inside This Issue... Unless otherwise noted, prices and data are as of July 14, 2017 PREFERRED INVESTOR COMPLIMENTARY ISSUE Strategies to Boost Your Cash Yield Investing for Income Unless otherwise noted, all prices are current as of July 14, 2017. Subscribe to Kiplinger’s Investing for Income for more timely rates and yields in every monthly issue. FREE 4 Model Portfolios See pages 8-12 T reasury and other interest rates have edged up over the last few months, shaving the market value of bonds and bond funds. At the same time, money is storming into stocks, sending the familiar market averages to records and plenty of individual shares so high you might think their prices are optical illusions. Bullish economic forecasts are everywhere. This might tell you that now is the time to turn your back on income and go all-out for capital gains. We disagree—and not only because we figure that if you’re reading this, you’re eager for fresh ideas and insights about dividends and interest. Since we introduced this letter in 2012, we’ve consistently—and accurately— advised that if you scatter your savings around various kinds of bonds and stocks and include “pass-through” securities including real estate investment trusts and infrastructure partnerships, the winners’ returns will offset, and usually exceed, any principal losses. At the same time, you’ll collect steady and often rising income. This is true whether the occasional setbacks result from higher interest rates, traders’ panicky pessimism, or real business weakness such as that which led to cuts in some oil and gas dividends when a barrel of oil sold for less than $30 back in 2016. But such downturns tend to be transitory. We’ve seen for years trading in reaction to Save 61%. Get 12 monthly issues of Kiplinger’s Investing for Income print or digital edition. Click here to subscribe

Transcript of August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to...

Page 1: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield

headlines saves little principal but frequently costs essential investment income. That’s

have money earmarked for a purpose with a nearing deadline, such as buying a vacation home this winter, you shouldn’t take much risk with it. But when you need investment income to supplement your cash flow, there are far, far better options that pay well, are fully liquid, and are not restricted to extremely wealthy or institutional investors. The following core principles are serving you well in 2017, as they have in previous years.

Cash flow is king. The golden rule of income investing is to be sure that you will get paid. Sure, a company might be unable to sustain its dividends if it reports a loss or an energy partnership could slash its payout because of turbulent oil and gas markets. But enterprises whose primary appeal

Timeless Tips for Successful Income Investing

why the best bond portfolio managers do not trade on day-to-day interest-rate forecasts and movements. It’s also why Kiplinger’s Investing for Income takes a long view and rarely replaces the names or the sectors in our interest-and-dividend-oriented model portfolios.

Despite persistent low yields, we are not opposed to money-market funds, bank deposits and short-term Treasury debt. If you

The golden rule of income investing is

to be sure that you will get paid.

continued on next page ...

Yieldcos Power Up With a Second Wind 3 These high-paying investments in alternative energy generation are coming into their own.

Standing Ovation for the Green Swans 4 How’s our low-risk, high-dividend stock portfolio faring? Very well, and we’re happy to tell you why.

Timely Tactic of the Month 4Yields are looking good on two- and three-year corporate notes.

Kiplinger’s 25 for Income 5A strong month, led by utilities and real estate. One member hits a four-year high.

Ask Jeff 6Questions about ETFs, a shopping-center REIT, Annaly preferred shares, and the relationship of junk bonds to stock prices.

What’s New in Cash 7Los Angeles gets upgraded while Standard & Poor’s keeps the Treasury’s rating down. And the return of non-traded REITs.

Rates and Yields 7

Model Portfolios 8The latest on our four rotating models: Dividend-A-Month, Juiced-Up Cash, Going for the Max, and Tax-Exempt Income.

Inside This Issue... Unless otherwise noted, prices and data are as of July 14, 2017

PREFERRED INVESTOR COMPLIMENTARY ISSUE

Strategies to Boost Your Cash Yield Investing for Income

Unless otherwise noted, all prices are current as of July 14, 2017. Subscribe to Kiplinger’s Investing for Income for more timely rates and yields in every monthly issue.

FREE4 Model Portfolios

See pages 8-12

Treasury and other interest rates have edged up over the last few months, shaving the

market value of bonds and bond funds. At the same time, money is storming into stocks, sending the familiar market averages to records and plenty of individual shares so high you might think their prices are optical illusions. Bullish economic forecasts are everywhere. This might tell you that now is the time to turn your back on income and go all-out for capital gains.

We disagree—and not only because we figure that if you’re reading this, you’re eager for fresh ideas and insights about dividends and interest. Since we introduced this letter in 2012, we’ve consistently—and accurately—advised that if you scatter your savings around various kinds of bonds and stocks and include “pass-through” securities including real estate investment trusts and infrastructure partnerships, the winners’ returns will offset, and usually exceed, any principal losses. At the same time, you’ll collect steady and often rising income. This is true whether the occasional setbacks result from higher interest rates, traders’ panicky pessimism, or real business weakness such as that which led to cuts in some oil and gas dividends when a barrel of oil sold for less than $30 back in 2016.

But such downturns tend to be transitory. We’ve seen for years trading in reaction to

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 2: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 2017

to the investing public is monthly or quarterly cash disbursements normally have sufficient cash flow, and some money in reserve, to meet obligations. You can judge this—as we do in our research—with the aid of the cash flow and operations sections of the issuer’s financial statements. Cash flow, along with money in reserve, should comfortably exceed the promised income distributions most or all of the time. An occasional stumble is acceptable. But we steer clear if a company or fund must regularly engineer big capital gains or borrow or sell new shares to fund dividends.

Maximize your after-tax income. You know municipal bond interest is generally tax-free (though some muni interest falls victim to the federal Alternative Minimum Tax and a some states tax out-of-state bond interest). But there are other tax-advantaged investments where the source, such as a REIT, either isn’t taxed on its own earnings or that hold down

your tax bill because part or all the funds that flow your way is a long-term capital gain or a return of capital. Even when you pay ordinary income tax rates, you might benefit from a tax break that applies at the corporate or fund level. And common and preferred stock dividends are often “qualified,” meaning your maximum federal bite ranges from 0% to 23.6%, not the 10% to 43.4% span that applies to ordinary income. In all, a widely-diversified income portfolio shouldn’t give you tax nightmares.

Get to know closed-end funds. These are complex investments with many moving parts. Sometimes, the costs are high. But CEFs are superb income sources because many employ leverage, borrowing at low interest rates to purchase top-quality stocks and bonds. Plus, their managers’ daily investment routine isn’t disturbed by cash inflows and outflows as it often is with ETFs and traditional mutual funds. Best of all, you can frequently buy closed-end fund shares below net asset value and thereby acquire an interest in every $1 of portfolio assets for 90 or 95 cents.

It is okay to reach for yield since you are not alone. It’s rare to find a popular investment guide that respects high yields. Instead you often read that you’re asking to get clobbered if you choose investments with above-average yields. Sometimes, that is true. But since 2008 savers and investors in all income brackets have been eager to buy—and keep—strong income-payers with a growth element: junk-bond funds, utility stocks, pipeline partnerships and REITs come

to mind. We detect a significant comfort level now that may be tested, but will not vanish. Obviously, if your bank offered 8% on a CD while a junk-bond fund paid 6%, you’d be smart to switch to the bank. But then so would everyone else. Until then, there’s safety in numbers in the quest for a reasonable yield.

Basic energy still matters. Despite the energy bust of 2015-2016, it would be a mistake to ignore oil and gas and all the efforts to process and transport it from its raw state to your car and your furnace. One of the arts of investing for income is to spot where money is moving and how best to tap into such commerce at the safest stages. That’s why pipeline and storage partnerships and other “midstream” and “downstream” energy investments have recovered smartly from the slump. These busy enterprises pay reliable dividends regardless of prices at the wellhead.

Finally, a magic number for you. It is 25, as in $25. That’s the original (par) value of most preferred stocks and bond snippets, our name for exchange-traded bonds or “baby bonds.” If you spot any under $25, you’re almost guaranteed a profit unless the issuer defaults, which isn’t as common a threat as you might think. The trick is to be patient and watch for your chance to buy below par. For example, in July you could find several preferred stock classes from BB&T, an extremely sound regional bank, for just about $25, a current yield of 5% to 5.5%. BB&T’s common shares pay a 2.6% dividend. Plus, preferred stockholders and bondholders must be paid before the common shareholders get a cent.

2

... continued from previous page

EDITOR IN CHIEF AND PUBLISHER Knight A. Kiplinger

EDITOR: Jeffrey R. Kosnett RESEARCH: Marc A. WojnoCOPY EDITOR: Frederic Fane Wolfer

SUBSCRIBER SERVICESTELEPHONE: 1- 866- 610- 1671E-MAIL: [email protected]

EDITORIAL OFFICES 1100 13th St., N.W., Suite 750 , Washington, DC 20005

REPRINT SERVICE PARS International Corp.TELEPHONE: 212-221-9595, ext. 322E-MAIL: [email protected]

Kiplinger’s Investing for Income (ISSN# 2167- 6240) Published monthly; $199.00 for one year.

Copyright © 2017 by The Kiplinger Washington Editors Inc., 1100 13th St. NW, Suite 750, Washington, DC 20005.

Kiplinger’s Investing for Income is carefully checked financial journalism; it is not personalized counsel on investing, taxes and law. We suggest that you consult with qualified professionals in those fields for advice tailored to your individual needs.

Get a FREE Special Report when you reply within the next 10 days.

Page 3: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield 3

In 2015, we were hopeful, although cautious, about a newfangled energy invest-

ment called a yieldco. A yieldco buys wind, solar and hydropower farms and plants as they are spun off from independent power pro-ducers. The lure to investors is income comparable to that from junk bonds and preferred stocks, plus the potential for divi-dend growth. Yieldcos also enjoy various tax breaks.

But just as interest was build-ing in these investments, the com-bination of falling energy prices and an oversaturation of initial public offerings prompted inves-tors to flip off the switch. Yieldco share prices dropped by half in mid and late 2015. Cash flows stayed strong, though, and now in-vestors are back, in the same way they have returned to the master limited partnerships whose units traced a similar roller-coaster pat-tern. In the first months of 2017, big yieldcos such as Atlantica Yield, NRG Yield and Pattern En-ergy Group have already returned between 10% and 35% and are yielding 5% or more.

What’s next? Restraint rather than irrational exuberance, says Garvin Jabusch, chief investment officer of Green Alpha Advisors, in Boulder, Colo., which special-izes in the group. He’s convinced that renewable-energy suppliers, conscious of not repeating the mini bubble of 2015, are eye-ing more-stable new offerings. “They’ll launch them when they have quality projects that can offer good yield, good funda-mentals and the ability to provide dividend growth in the future.” Jabusch notes that in 2016, 65%

of new U.S. generating capacity came from either wind or solar. “Renewables are outpacing gas development two to one, and as that continues, a lot of that gener-ation will be owned by yieldcos,” he says. His view is tempered, though, by the possibility that rising credit costs will undermine the profitability of new projects.

Besides an expanding market, yieldcos have another advantage: insider-ship. It is common for a yieldco to have

an agreement called a right of first offer, or ROFO. It gives the yieldco the right to acquire the most-profitable projects in the sponsor’s portfolio and the authority to reject potentially dismal deals. Such agreements ensure that yieldcos are not a dumping ground for second-rate assets, as is sometimes the case with publicly traded spinoffs of famous private-equity firms and hedge funds. “Understand the portfolios the yieldco owns today, the risks associated with the types of power production, the management team and the ROFO pipeline, because that’s what will determine its future growth,” says Martin Wildy, who manages Eventide Multi-Asset Income Fund (symbol ETAMX), which has 13.0% in yieldcos and a 9.1%

year-to-date return. The follow-ing six yieldcos deserve a look.

Our 2015 picks…Atlantica Yield (ABY, $20,

5.1% yield, year-to-date total return 7.5%, three-year divi-dend growth rate NA). Formerly Abengoa Yield, this diversified yieldco owns 22 assets in the U.S., Canada, Latin America and Europe.

NRG Yield (NYLD-A, $17, 6.8%, 16.1%, 16.4%). The child of NRG Energy, this yieldco owns and operates such projects as a new district energy center in Pittsburgh that delivers steam, chilled water and backup power to UPMC Mercy hospital.

Pattern Energy Group (PEGI, $24, 7.0%, 30.1%, 9.1%). Its 18 wind-power facilities in the U.S., Canada and Chile benefit from Pacific Ocean breezes.

…and three new ideasBrookfield Renewable

Partners (BEP, $33, 5.4%, 14.3%, 6.5%) is a spin-off from the Kiplinger Income 25 stalwart with the symbol BIP. It has 250 renewable power facilities in North America, Latin America and Europe.

Hannon Armstrong Sus-tainable Infrastructure Capital (HASI, $23, 5.8%, 23.6%, 14.5%) finances solar- and clean-energy firms, making it an indirect way to get in on this growth burst.

NextEra Energy Partners (NEP, $38, 4.0%, 53.1%, 26.4%) owns fully contracted wind and solar projects throughout North America. It also owns some natural gas in Texas—but that’s a small part of its holdings.

Yieldcos Power Up With a Second Wind

Share prices lost 50% in 2015, but cash flow

remained strong and now investors are back.

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 4: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 20174

As a subscriber you get direct access to the editor for personal answers to your questions.

A bunch of readers who caught our reference to the Green Swans in

a recent letter are eager for an update. So for you, and for newer subscribers unfamiliar with the Swans, here’s the scoop on our ultra-low-risk growth-and-income stock portfolio. Since our most recent review in January 2016’s letter, the Swans have done splendidly. In the 20 months ending July 21, they averaged a total return of 24.1%—just about even with the Standard & Poor’s 500-stock index, dividends in-cluded. Nine of the 10 delivered a profit, and eight gained in double figures. Our Swans also beat the Dow Jones industrial average and S&P 500 handily in 2015.

Who are these birds? They are born out of our thinking that when the stock market struggles, you shouldn’t quit—but it’s okay to trim risk. This portfolio is designed to protect capital in sell-offs but participate in rising markets. Each member of the flock must demonstrate a pat-tern of maximum share-price stability and secure and growing dividends. Just as important, each company must have moderate debt and command of an understand-able and noncyclical business or businesses. The Swans passed a tough test the first six weeks of 2016, when the indexes plunged for no apparent reason. While the Dow and S&P 500 lost nearly 9% (counting dividends), the Swans lost just 1.9%, and five of the 10 stayed in the plus column during the swoon. The group has main-tained that advantage all year; each member has raised dividends or will do so by year-end.

Swan is an acronym for “sleep well at night.” It’s also a backhanded reference to “black swan,” an unpredictable catastro-phe brought on by events such as an act of war, a series of bank failures, or default by a key coun-try such as China or Russia. Here in the U.S., a failure to raise the Treasury’s debt ceiling that ruined our nation’s full faith and credit would be a black swan. We aren’t in the business of predicting such shocks or recommending end-of-the-world tactics. We prefer to seek out the green rather than obsess about the black. Here’s the list. All figures below are as July 21, 2017.

Accenture (symbol ACN, $129, yield 2.0%, 20-month total return with dividends 26.1%). A 10% dividend boost this month is an extra reward.

Automatic Data Processing (ADP, $105, yield 2.2%, return 30.0%). Shares haven’t had a los-ing year since 2008.

Coca-Cola (KO, $45, yield 3.5%, return 11.9%). Not a great growth stock now, but a safe dividend ace.

Genuine Parts (GPC, $83, yield 2.9%, return 1.1%). Recov-ered from a poor showing in 2015.

Illinois Tool Works (ITW, $147, yield 2.0%, return 67.1%). An 18.2% dividend increase started in October adds to a great record.

Lancaster Colony (LANC, $126, yield 1.7%, return 18.1%). It hasn’t lost money for share-holders since 2008.

3M (MMM, $211, yield 2.5%, return 41.8%). One of the best

and steadiest members of the Dow, with the broadest range of products and services.

Sysco (SYY, $51, yield 2.5%, return 30.7%). This Swan flew somewhat out of formation when it took on $5 billion in debt to acquire a big British and Swedish food supplier. But Sysco stays because the debt is low cost and food distribution is steady and nonseasonal.

Walgreens Boots Alliance (WBA, $79, yield 1.8%, return -0.8%). The largest retail phar-macy in the U.S. and Europe hopes to conclude acquisition of Rite Aid Corp. early this year.

WD-40 (WDFC, $108, yield 1.8%, return 14.5%). Angling for faster growth, it might borrow to expand on its one-product fame. We’ll keep an eye on it.

Standing Ovation for the Green Swans

Timely Tactic of the MonthThe yields of one-, two- and three-year Treasuries and investment-grade corpo-rate bonds have edged closer to the rates of 10-year and longer T-bonds than you might imagine. That argues for the short-ies—and not just from Uncle Sam. Brows-ing the corporate-note racks at Schwab’s, we see the likes of Ford Motor Credit 2.5% notes due April 2019, rated BBB and selling at just about par (CUSIP 34540TLJ9), as well as Senior Housing Property Trust 3.25% notes due May 2019, rated BBB– and trading at a little over par (81721MAJ8). Both yield about 2.5% to maturity, depending on the daily trading, and that’s almost as much as a 30-year Treasury. This is one credit risk you are definitely paid to take.

Page 5: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield 5

for Income 25

A calm month, and a bunch of our favorites rallied strongly. Our utilities extended their sizzling streak as American Electric Power tacked on 6.4% and CenterPoint added 5.8%. In real estate, Annaly

Capital Management jumped 9.4%, to $12.36—its highest price since 2013, and high enough to knock the current yield below 10%. Welltower added 5.2%, and Realty Income gained 3.5%. Realty Income’s price is holding above $55, even as other retail-property REITs keep sliding on general mis-trust of the sector. Pimco Corporate Income & Strategy rose 4.0% as its premium to net asset value surpassed 10%. That is normally a sell signal for any closed-end fund, and PCN’s year-to-date return on its share price is over 20%. But this is among Pimco’s brightest stars and has an amazing 15-year record; PCN has at times traded for even bigger premiums. Our only notable loser was Magellan Midstream Partners. The gasoline pipeline MLP dropped 5.4% despite another quarterly distribution boost. This midstream partnership is safe but could use a jolt of enthusiasm.

Funds in italics pay tax-exempt income. Investments with an asterisk (*) are partnerships. Prices and yields as of June 16, 2017. SOURCES: Fund companies, Morningstar Inc., Yahoo.

Utility stocks Price Yield Frequency

American Electric Power (AEP) Traditional electric company serving 11 eastern and southern states $72.42 3.3% quarterly

AT&T (T) Wireless-service giant that grew out of the former SBC 38.96 5.0 quarterly

CenterPoint Energy (CNP) A major U.S. gas utility and owner of Houston Electric 28.88 3.7 quarterly

National Grid (NGG) British national gas and electric utility that also operates in New York and New England 65.97 4.5 semiannually

High-yielding open-end bond funds

Aberdeen Global High Income (BJBHX) Intermediate-term corporate bonds from all over the world $8.99 5.4% monthly

Buffalo High-Yield (BUFHX) High-performance junk bond fund that also owns some convertibles for possible growth 11.28 4.4 monthly

DoubleLine Total Return (DLTNX) Income fund that makes the most of mortgage securities 10.75 3.5 monthly

Fidelity Capital & Income (FAGIX) Creative and aggressive junk bond fund 10.03 4.0 monthly

Fidelity New Markets Income (FNMIX) Impressive emerging-markets bond fund 16.33 5.3 monthly

Loomis Sayles Bond (LSBRX) Go-anywhere investment-grade bond fund that is currently cautious 14.11 2.3 monthly

Closed-end mutual funds and ETFs

AllianceBernstein Global High Income (AWF) High-yield corporate bonds and government bonds from emerging markets $12.84 6.5% monthly

Dreyfus Municipal Bond Infrastructure (DMB) A fund that owns many road and transportation bonds 13.18 4.8 monthly

iShares Standard & Poor’s U.S. Preferred Stock (PFF) ETF with hundreds of preferred stocks 38.98 5.8 monthly

Nuveen Municipal Value (NUV) No leverage here, so less yield than Dreyfus Infrastructure but more safety 10.09 3.9 monthly

Pimco Corporate & Income Strategy (PCN) An unusual mixture of high-yield corporate, muni and foreign bonds 17.05 7.9 monthly

Templeton Global Income Fund (GIM) A combination of emerging markets and rich countries’ government bonds 6.68 4.1 monthly

Real estate investment trusts

Annaly Capital Management (NLY) Borrows cheaply to reinvest in government-guaranteed mortgage securities $12.36 9.7% quarterly

Digital Realty Trust (DLR) Developer and operator of data centers in the U.S., Canada, Europe and Asia 116.61 3.2 quarterly

Realty Income (O) Landlord to chain stores and restaurants, also known for 563 straight monthly dividends 56.67 4.5 monthly

Welltower (HCN) Develops and owns assisted-living facilities, hospitals and medical labs 75.60 4.6 quarterly

Energy investments and partnerships

Brookfield Infrastructure Partners (BIP)* Owns toll highways, ports and transmission lines $40.24 4.3% quarterly

Cedar Fair (FUN)* Partnership that owns theme parks coast to coast 70.68 4.8 quarterly

Magellan Midstream Partners (MMP)* One of the largest pipeline carriers of gasoline, diesel and chemicals 69.83 5.0 quarterly

Occidental Petroleum (OXY) A mostly domestic oil and gas producer 61.83 4.9 quarterly

Suburban Propane Partners (SPH)* Nationwide supplier and distributor of LP gas and similar fuels 25.10 14.1 quarterly

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 6: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 20176

Risk-Free 100% Money-Back Guarantee.

Ask Jeff Readers are invited to send questions about income investments to [email protected]. I’ll answer you personally if there’s no space here for a published reply.

Dear Jeff:Besides ease of trading, is there any practical difference between a no-load mutual fund and an exchange-traded fund that has the same goals and similar hold-ings? For example, many Vanguard funds and ETFs look identical.John

Dear John:It isn’t that simple. ETFs tend to have lower expense ratios than mutual funds. And when you place an order while the market is open, you get the immediate price and execution with an ETF, while a mutual fund transaction is pinned to the day’s closing price. If you confine this comparison to Van-guard, which has uniquely mini-mal fees for index mutual funds, the performance difference will be nugatory. However, in fixed-in-come or less-liquid sectors, ETFs are more volatile and unpredict-able. ETFs must fulfill all-day buying and selling in investment categories that aren’t accustomed to rapid-fire trading. We strongly prefer actively managed funds for municipal and junk corporate bonds.

Dear Jeff: Kimco Realty (KIM, $18, yield 5.8%) is near its 52-week low. It’s been around 50 years, but is it going down with the rest of retail? Paul

Dear Paul:Kimco and comparable REITs that own hundreds of supermarket-anchored shopping centers (plus gyms, cinemas and restaurants) don’t deserve the same brutal, Amazon-inflicted punishment as the owners of defunct big box stores and half-empty malls. Kimco has 4,100 tenants among its 8,700 leases, and no Macy’s or Sears stores. Its fortunes have more to do with grocers and the adjacent bagel and pizza shops and hair salons. The market ten-tatively gets this: Kimco’s June 16 price of $18.49 was up 7.9% from a low of $17.14 on May 31. Amazon will keep up the pressure with faster delivery. But the retail-store game isn’t over. Kimco and its rivals are keeping occupancy at 95% and filling vacancies at higher rents than departing tenants were paying. The dividends are secure, and growth is possible as these REITs complete appealing expansion and renovation proj-ects in rich cities and suburbs and finance them cheaply.

Dear Jeff: I am 80 and happily own Annaly Capital common. Would the pre-ferred shares be safer at my age?Charles

Dear Charles:Since Annaly boasts about the $15 billion of common dividends it has

paid since forming in 1997, it’s unimaginable that it would skip preferred dividends—and thus be barred from paying on the com-mon shares—unless the entire $12.6 billion leviathan imitates the Titanic. But Annaly has at times reduced common dividends, so, yes, the preferreds are a fine idea. Annaly has several series whose coupons range from 7.50% to 7.875%. However, there’s a rub: Each is callable now or as soon as September. I would not be shocked to see Annaly redeem and offer a new series with a 5% or 6% handle. It would sell out in a jiffy. So don’t pay more than $25 for existing shares.

Dear Jeff:The June 2017 write-up of Going for the Max says junk bonds have a low correlation to stocks. Isn’t it true that junk moves 75% to 80% with large-capitalization stocks? That doesn’t count as low to me.Don

Dear Don:Eaton Vance’s market monitor pegs the correlation of high-yield bonds and the S&P 500 at 0.65. (That means the two should move in sync 65% of the time.) That isn’t low; it’s higher than most correlations between two catego-ries. However, the connection be-tween U.S. junk bonds and riskier stock classes, such as emerging markets, is now more than 70%. And junk bonds are not easily de-scribed as one group. Energy and telecommunications debt is close to half of the U.S. junk universe, and both of those stock sectors are lagging in 2017, even as the S&P 500 and the Dow Jones industrial average reach record highs.

Page 7: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield 7

What’s New in CashL.A. versus the U.S. In June, Moody’s upgraded Los Angeles County’s bond rating to Aa1, citing such strengths as the county’s “massive and diverse tax base, large and expanding economy, healthy cash and reserve levels, and low debt burden.” Standard & Poor’s said similar things as it upgraded the City of L.A. to AA (Moody’s rates the city only Aa2, the equivalent of AA). This contrasts with the ratings agencies’ frequent warnings and concerns about major cities’ creditworthiness. At the same time, S&P “reaffirmed” its controversial downgrade of the United States of America to AA+ rather than restore its triple-A status. S&P cut the Treasury’s rating in August 2011 to protest congressional brinksmanship with the debt ceiling, which could have forced the government to default. In leaving the rating at AA+ once again, S&P chided Congress for the “lack of cohesion, not just across, but within parties,” and it predicted sub-2% long-term economic growth. Currently, you can lend to Uncle Sam for 10 years at 2.1% taxable, or to Los Angeles tax-free for 10 years at 1.8% (worth 2.7% for a taxpayer in the 33% bracket, or more if you live in the Golden State and avoid its tax, too).

The (pointless) return of private REITs. Since 2013, annual sales of non-traded real estate investment trusts have cratered from $20 billion to less than $5 billion. (REITs listed on the New York Stock Ex-change are valued at just below $1 trillion.) Many of those older non-traded, or “private,” REITs have since converted to publicly traded form, and often those deals forced shareholders to take a haircut because the portfolios’ net asset values had been di-minished when the REITs resorted to asset-stripping to keep up their high promised distributions. Black-stone Group is now raising $5 billion for BREIT, the non-traded Blackstone Real Estate Income Trust. (The daunting 307-page prospectus is available at www.bxreit.com.) It has several share classes and a maximum up-front sales commission of 3.5%, but it also demands deferred fees and sales charges, as well as a “performance participation allocation”—gobbledygook for the one-eighth of the total return you cede to the house if the REIT meets easily attainable performance thresholds. Humbug.

RATES AND YIELDS MONEY MARKET FUNDS

Taxable Yield Phone Number

Vanguard Prime MMF Inv (VMMXX) 0.97% 800-662-7447

Northern Money Market Fund (NORXX)* 0.84 800-595-9111

Category Average 0.46%

Tax-Free Yield Phone Number

Northern Municipal MMF (NOMXX)* 0.73% 800-595-9111

Vanguard Municipal MMF (VMSXX) 0.68 800-662-7447

Category Average 0.32%

*Fund is waiving all or a portion of its expenses. The 30-day simple yields are to June 6.SOURCE: Money Fund Report

BENCHMARKS Year Ago 3 Months Ago This Month

Inflation rate* 1.00% 2.70% 1.90%

Six-month Treasury 0.36 0.89 1.13

One-year Treasury 0.53 1.01 1.21

10-year Treasury 1.57 2.53 2.16

*Year-to-year change in CPI as of May 2016, February 2017 and May 2017.SOURCES: Bureau of Labor Statistics; U.S. Treasury.

CERTIFICATES OF DEPOSITSix Months Yield Phone Number

First Internet Bank of Indiana (Ind.) 1.16% 888-873-3424

VirtualBank (Fla.) 1.11 877-998-2265

National Average 0.21%

One Year Yield Phone Number

First Internet Bank of Indiana (Ind.) 1.47% 888-873-3424

VirtualBank (Fla.) 1.46 877-998-2265

National Average 0.35%

Five Years Yield Phone Number

Popular Direct (Fla.) 2.35% 800-274-5696

Synchrony Bank (Utah) 2.35 800-903-8154

National Average 0.91%

Yields include compounding and are as of June 13. For information on deposit insurance, go to the Web site of the Federal Deposit Insurance Corp. (www.fdic.gov). SOURCE: Bankrate.com

FIXED ANNUITIES

Single-Premium Immediate-Annuity Monthly Payout Factor Highest Average

Male age 65 $537 $515

Female age 65 516 490

Male age 70 605 581

Female age 70 573 549

Payouts are guaranteed to the annuitant for life, with a minimum payout period of ten years. Payout factors are per each $100,000. SOURCE: Comparative Annuity Reports (www.comparativeannuityreports.com). Annuity data are to June 2017.

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 8: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 201788

Your Kiplinger’s Investing for Income subscription features four model portfolios to suit a variety of investment needs and preferences. We feature one portfolio per issue for four months and repeat the cycle throughout the year.

The monthly featured portfolio normally appears on page eight, the back page of each issue. The Special Issue you’re currently reading, however, includes all four model portfolios to get you up to speed as quickly as possible with all of the cash-generating advice and guidance Kiplinger’s Investing for Income has to offer.

Model Portfolio #1: Dividend-a-Month

First on the list you’ll find the latest numbers for our Dividend-a-Month portfolio, a selection of 12 excellent dividend stocks with staggered pay dates. The idea behind this collection is simple: You’ll get spendable cash month in, month out, without interruption. What’s more, you’ll discover how to play the calendar without dabbling in questionable stocks or worrying about the reliability of your dividends. The selections pass several tests, starting with a five-year average annual dividend growth rate of 5% or better, plus our confidence that the streak will continue.

Model Portfolios #2-4

To give you a head start on the additional income investing strategies you can look forward to in coming issues, on subsequent pages you’ll find the three other portfolios that we keep our eye on. One or more of them is sure to match your investing goals and style!

Check out the following pages for 4 Model Portfolios for Income Investors Who Seek Higher Cash Yields

Investing for Income

Page 9: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield 9

Illinois Tool WorksITW, $146, yield 1.8%5-yr dividend growth

rate of 12.5%

Valero EnergyVLO, $68, yield 4.1%5-yr dividend growth

rate of 38.5%

IntelINTC, $35, yield 3.1%5-yr dividend growth

rate of 5.3%

McCormick MKC, $98, yield 1.9%5-yr dividend growth

rate of 8.7%

Realty IncomeO, $56, yield 4.5%

5-yr dividend growth rate of 7.7%

Kimberly-Clark KMB, $125, yield 3.1%

5-yr dividend growth rate of 6.5%

WisdomTree MidCap DON, $98, yield 2.5%5-yr dividend growth

rate of 10.7%

Procter & GamblePG, $87, yield 3.2%5-yr dividend growth

rate of 4.2%

Johnson & JohnsonJNJ, $133, yield 2.5%5-yr dividend growth

rate of 6.6%

Automatic Data Processing ADP, $101, yield 2.3%5-yr dividend growth

rate of 10.4%

General DynamicsGD, $201, yield 1.7%5-yr dividend growth

rate of 10.5%

American Electric PowerAEP, $68, yield 3.5%5-yr dividend growth

rate of 4.7%

January February March April

AugustJulyJune May

September October November December

The bulls are still in evidence. But since our last review of this portfolio in April’s letter, the stock market has been placid, notable only for the occasional cheery

headline saluting the latest all-time high of the Dow Jones industrial average or Standard & Poor’s 500-stock index. From March 17 through July 14, the dominant theme was actually the typical trading day when the benchmark averages barely budged. Indeed, our portfolio snoozed to a 0.1% return over these four months. (The S&P 500, dividends included, outpaced us with a 4.1% return for the period.)

Two of our 12 selections’ prices were un-changed when rounded to the nearest dollar: Intel and WisdomTree MidCap Dividend ETF. Six fell, and four gained. Nothing traveled more than Illinois Tool Works, whose shares rose 7.4%, to $146, just shy of the diversified industrial con-cern’s $150 record price reached in June. We added ITW to our calendar in December 2016 at $124. ITW is more than fulfilling Dividend-a-Month’s dual mandate of dependable income plus respectable growth. And ITW regularly raises its dividends, effective with the October payment. Watch for the news any day.

Since March, four of the portfolio’s companies raised dividends: General Dynamics, by 10.5%;

Johnson & Johnson, 5.0%; Procter & Gamble, 3.1%; and Realty Income, 0.5%. (GD and J&J also reached all-time high prices during the period.) The WisdomTree ETF distributed 10.8% more cash during this period than it did during the four-month interval that ended in March. WisdomTree has a minimal total return of 1.1% since March 17, but its five-year annualized return of 15.5% through July 14 smashes the lie that smaller com-panies pay good and rising dividends only when the bosses have nothing better to do with money that might otherwise generate growth. We recom-mend this ETF for all dividend-growth portfolios, whether or not you adopt this monthly schedule.

Readers sometimes ask us if this portfolio is available in an exchange-traded or mutual fund. The answer is no. Kiplinger is neither a registered investment advisory firm nor an index provider. In addition, although 12 stocks scattered across so many sectors is diversified enough that we believe it is safe as part of your personal investment plan, it wouldn’t work well if a fund manager had to constantly buy or sell all 12 names (or most of them) based on inconsistent cash inflows and outflows. The same is true of our Green Swans low-volatility stock portfolio, whose 10 selections include ADP and ITW from this page. It, too, is not a substitute for a mutual fund.

1Model Portfolio: Dividend-a-MonthWe review each of our model portfolios every four months. This check-up and analysis was published in the August, 2017, issue and covers

the period ending July 14, 2017. For the latest data and to keep up to date, subscribe to Kiplinger’s Investing for Income.

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 10: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 201710

Model Portfolio: Juiced-Up CashOn June 14, the Federal Reserve pegged the value of risk-free over-night credit at a minimum of 1%. We’ve always tried to earn at least twice that on our collection of low-

risk cash equivalents and alternatives, but now it’s urgent that we find 2%, or you may fairly ask why you should take even a smidgen of risk. Fortunately, with the economy healthy, defaults rare and enough banks willing to pay more-com-petitive rates on deposits, 2% is doable.

We accomplished it in the period from February 13 through June 16. Our hypotheti-cal $50,000 grew to $50,374, for an annualized gain of 2.24%. Of that, $302 came from interest and dividends and $72 from slight appreciation in the value of our short-term funds. All five funds gained in net asset value, though Fidelity Floating-Rate and Northern Ultra-Short were up just a penny. Still, we’ll take it. The idea here is to protect your savings and out-yield Treasury bills or money market funds.

Our most pleasing result, for the record, was by MINT, the Pimco short-maturity ETF. Its share price advanced from $101.45 to $101.67, which, along with $36 of income, generated a four-month return of 0.7%, putting it ahead of our 2% annual target. Fidelity Floating-Rate, which yields more because it extends longer and lower-rated credit, earned 1.3% all told, or nearly 4% annualized. And while our one-year CD and online savings accounts are still shy of 2%, we expect to see increasingly richer offer-ings in both of those competitive categories as some (not all) lenders willingly pay more to keep cash on hand. Your neighborhood bank, however, is still likely to see weak demand for business and real estate loans. If that persists, don’t expect the bankers to reprice deposits just because of Federal Reserve adjustments.

There’s no reason to change any of our recommended funds. To run the juicer at higher speed, look at our Timely Tactic this month. It calls attention to investment-grade short-term corporate bonds with yields to maturity between 2% and 3%. Do not reflexively select the highest yields on offer, and remember that unsecured credit of business development companies and

other chancy lenders does not qualify as cash or cash-like. The minor risk of missed payments in the bank-loan fund in our collection is enough risk for this portfolio. But while many of those loans are junk-rated, they are senior credits and are usually secured.

$7,500 Pimco Enhanced Short Maturity Active ETF (symbol MINT, yield 1.4%). They’re putting more cash to work, but the total maturity of this fund is about four months. Yet Pimco finds ways with some bonds and mortgages to yield a decent 1.4%.

$7,500 Fidelity Floating-Rate High Income (FFRHX, 3.9%). The category has been perform-ing unevenly, but has improved of late. In any event, we have no quarrel with Fidelity’s man-agement or the fund’s low expenses.

$7,500 Online savings account. At press time, the leader is BankPurely at 1.30% and a minimum balance of $1.

$7,500 One-year CD. First Internet Bank of Indiana is a top performer this time at 1.47%. This category’s yield is up from 1.30% in March.

$7,500 Northern Ultra-Short Fixed-Income (NUSFX, 1.2%) invests in short Treasuries and short-term investment-grade corporate bonds. Its expenses of 0.25% are among the lowest in the category.

$6,250 Vanguard GNMA (VFIIX, 2.2%). If you want to enhance the yield a bit and can accept some longer maturities as a balance to the ultra-short funds, you can pick up some extra income here without much risk. Consider this a taste test, though. Four months from now, this entire fruit punch might be a different flavor.

$6,250 Vanguard Short-Term Bond ETF (BSV, 1.6%). This tracks the Barclays index of one-to-five-year government and high-quality corporate bonds. It is slightly riskier than the Pimco ETF, but that risk is offset by the extra yield.

2We review each of our model portfolios every four months. This check-up and analysis was published in the July, 2017, issue and covers

the period ending June 16, 2017. For the latest data and to keep up to date, subscribe to Kiplinger’s Investing for Income.

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 11: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

August 2017 Investing for Income: Strategies to Boost Your Cash Yield 11

So much for the truism that reaching for yield is always treacherous. Max registered a positive return for the fourth consecutive measuring period, generating a modest $1,540 gain on

our hypothetical $100,000. That translates to 4.6% annualized. Not fabulous, but acceptable after a series of double-digit-pace total returns. None of the eight components cut dividends. Only one, Suburban Propane, had a severe share-price decline.

A reader asks about Suburban in this month’s “Ask Jeff,” so we won’t repeat ourselves here, except to note that SPH’s 22.1% fall from $31.51 to $24.55 cost Max $2,754. Fortunately, Annaly shares rallied 11.3%, and SPDR Interna-tional Dividend’s shares added 5% as overseas stock markets made strong gains in early 2017. Ares Capital’s shares slid 3.8%, from $16.97 to $16.33, but that’s still well above the midpoint of Ares’ 52-week price range. What matters with high-yielding investments of all kinds is whether the cash flow is reliable enough to cover current distributions. In Ares’ case, it is.

The question of the moment is whether we should introduce some different categories that can deliver yields of more than 6%, which is our standard threshold for investments that fit into the highest risk level of your income portfolio. Although it’s common to label junk bonds and mortgage real estate investment trusts perilous, the fact that they have a low correlation to Stan-dard & Poor’s 500-stock index means including them in Max disperses some risk for readers who also invest in stocks. And although the history and business models of Ares Capital and Annaly Capital Management imply high volatility and potential danger, both have reasonably steady returns.

Frankly, it’s tough to find liquid and under-standable investments that yield enough for us to shake up Max’s list. We’ve been waiting for the few property REITs that yield 7% and up to show more share-price stability. One possibility is Senior Housing Property Trust (symbol SNH, $21.50, yield 7.3%, one-year total return to May 12, 21.8%). It was a dud from 2012 into 2016, but it kept up its dividends and is now deliver-

ing good returns. Senior housing is a misnomer. SNH combines opulent assisted living (almost no government-paid residents) and medical and biotech offices; more than half of its assets are not in housing. We have a few other extra-high-yield REITs in sight. If Suburban doesn’t bounce back, or maybe even if it does, we may put some property into this portfolio in October.

Aberdeen Global High Income (BJBHX, $8.98, current yield 5.3%, one-year total return to May 12, 11.4%) holds high-yield corporate bonds and bank loans.

Annaly Capital Management (NLY, $11.30, yield 10.6%, total return 13.8%). This mortgage REIT prospers from low short-term rates on debt it uses to invest in government-guaranteed mortgages.

Ares Capital (ARCC, $16.33, yield 9.3%, total return 17.4%). This business development company lends to emerging businesses and also benefits from a low cost of funds.

Global X Super Dividend ETF (SDIV, $21.08, yield 7.1%, total return 9.4%) invests in about 100 of the highest-yielding solid small and midsize firms in the U.S. and overseas.

iShares S&P U.S. Preferred Stock ETF (PFF, price $38.89, yield 5.6%, total return 5.1%) is the oldest and largest fund of preferred stocks, with more than 300 holdings.

SPDR S&P International Dividend ETF (DWX, $38.98, yield 5.3%, total return 17.3%) com-plements Global X by investing in 100 of the largest foreign companies known for paying high dividends.

Suburban Propane Partners (SPH, $24.55, yield 14.5%, total return –13.4%) distributes propane and other liquid fuels.

Vanguard High-Yield Corporate (VWEHX, $5.93, yield 5.4%, total return 10.5%) is an ex-cellent, and low cost, domestic junk bond fund.

3Model Portfolio: Going for the MaxWe review each of our model portfolios every four months. This check-up and analysis was published in the June, 2017, issue and covers

the period ending May 12, 2017. For the latest data and to keep up to date, subscribe to Kiplinger’s Investing for Income.

Save 61%. Get 12 monthly issues of Kiplinger’sInvesting for Income print or digital edition.Click here to subscribe

Page 12: August 2017 Investing for Income: PREFERRED … · August 2017 Investing for Income: Strategies to Boost Your Cash Yield headlines saves little principal but frequently costs essential

Investing for Income: Strategies to Boost Your Cash Yield August 201712

Model Portfolio: Tax-Exempt IncomeTax-free bonds took heavy shelling just as we totaled up this portfo-lio’s results for January’s letter. The markets expected that the incoming president and a Republican-controlled

Congress would quickly slash tax rates, undermin-ing the value of tax-free interest from municipal bonds. In addition, all kinds of bonds were under pressure from gathering expectations that inter-est rates would shoot up. And the tight supply of municipals loosened up, removing the “scarcity premium” that had boosted tax-exempt returns. As we reported in February, this “perfect storm” knocked 4% off the value of municipals. Our Tax-Exempt Income portfolio lost 3.4% between August and December, its only loss since 2013. We were dismayed but not surprised.

And we suspected that selling might be over-done. Earlier municipal-bond reversals, such as that of 2013, ended rather quickly and turned into strong rallies. Sure enough, the bombardment of municipal bonds has ceased. All nine of our selections are in the black for the year to date, as well as for our four-month measuring period from December 9 through April 13. Our hypothetical $100,000 investment finished the period at $102,111.

Some $990 of this gain comes from interest income and from funds’ capital-gain distributions. The other $1,121 represents share-price move-ments. The total 2.1% return translates to 6.3% for a 12-month period. That doesn’t completely make up for the previous losing cycle, but it’s decent in light of the unsettled tax situation.

Short-term: 30%. These funds have durations of three years, so there will be little if any bounce in net asset value. Their yields are generous for the cat-egory, thanks to good bond selection and low costs.

$15,000 T. Rowe Price Tax-Free Short-Intermediate (symbol PRFSX). Yield, 1.4%, total return 0.1%.

$15,000 VanEck Vectors AMT-Free Short Municipal ETF (SMB). Yield, 1.1%, total return 0.1%.

Intermediate-term: 45%. Unlike Treasuries, where 10-year bonds are considered long-term, intermediate munis include maturities as long as 20 years. They provide good income with little interest-rate risk.

$15,000 Fidelity Intermediate Municipal Income (FLTMX). Yield, 2.0%, total return 0.1%.

$15,000 Schwab Tax-Free Bond (SWNTX). Yield, 2.3%, total return –0.1%.

$15,000 Baird Quality Intermediate Munici-pal Bond (BMBSX). Yield, 1.9%, total return –0.2%.

Long-term: 25%. Although we give the go-ahead to move some cash into high-yield munis, for now we’re sticking with the investment-grade funds.

$6,250 Vanguard California Long-Term Tax-Exempt (VCITX). Yield, 3.4%, total return –0.1%.

$6,250 USAA Tax-Exempt Long-Term (USTEX). Yield, 4.1%, total return 0.6%.

$6,250 Vanguard Long-Term Tax-Exempt (VWLTX). Yield, 3.6%, total return 0.3%.

$6,250 Wells Fargo Advantage Municipal Bond (WMFAX). Yield, 3.1%, total return 0.7%.

4We review each of our model portfolios every four months. This check-up and analysis was published in the May, 2017, issue and covers

the period ending April 13, 2017. For the latest data and to keep up to date, subscribe to Kiplinger’s Investing for Income.

© Copyright 2017 The Kiplinger Washington Editors, Inc. KISMP074

Name

Address

City/State/ZIP

Phone

E-mail

q Check enclosed (payable to Kiplinger’s Investing for Income)

q Visa q MasterCard q American Express q Discover

Copyright 2012 • The Kiplinger Washington Editors, Inc. • 1100 13th Street NW • Washington, DC 20005-4051 • 202-887-6426

May 2012

Investing for Income: Strategies to Boost Your Cash Yield

After standing tall in 2011,

some areas of the bond

market have wobbled

in 2012. The late-March climb

of yields on long-term Treasury

bonds from 1.8% to 2.4% suggests

that we’re seeing the start of a bear

market in government bonds, if

not all bonds. Although Treasury

yields backtracked in April, the

brief early-spring selloff nicked

7% from the price of a ten-year

Treasury and almost as much

from plenty of popular bond

mutual funds. (The general rule,

of course, is that as interest rates

rise, the market value of existing

bonds—and the net asset value

of bond-fund shares—goes in

the opposite direction.) So you

can’t afford to be complacent.

Treasuries are more dangerous

than you might think.

The Threat of Rising Rates

Ironically, the cause for concern

is a collection of positive

economic signs: growing

confidence that the recovery is

sound, with favorable trends in

jobs and housing and a strong

stock market. History tells us

that in this environment, it’s

more likely that interest rates

will go higher rather than stay

put. It also means more appetite

for risk from investors who have

been willing to buy and hold

Treasuries the past few years

despite ridiculously low yields.

Kiplinger’s doesn’t forecast an

economic boom, but our target

for U.S. growth of 2% to 2.3%

in 2012 is enough to suggest

that bond yields have already

that yield 2%, imagine what will

happen if the economy catches

fire and bond yields ratchet up

to 5% over the next couple of

years. You could easily lose as

much as 30% of your principal.

In the stock market, that’s called

a crash. Under the most benign

outlook for Treasuries—that

yields will stay relatively flat this

year and creep up only gradually

in 2013—you’ll still do little

more than break even as the loss

of principal offsets puny yields.

That is not a happy picture.

But neither is it a call to panic

and run from everything that

resembles a bond. For example,

there’s no reason to tear down

a corporate or municipal bond

ladder built several years ago

that still pays you 5% or 6%. The

puzzle is what to do if you have

fresh money to invest or reinvest.

You need to know which kinds

of bonds are best placed now to

Where to Invest Now for Safety and Income

bottomed and will gradually

move closer to the normal levels

seen in previous economic

expansions by next year.

Now, back to the value of

bonds. When interest rates climb

from extremely low levels, the

damage to principal is severe.

Paul Lefurgey, head of the

bond department at Madison

Investment Advisors, in Madison,

Wis., expresses it this way: If

you own long-term Treasuries

Municipals head

the list of

timely income

opportunities.

CHARTER MEMBER PREMIER ISSUE

Strategies to Boost Your Cash Yield

Investing for Income

continued on next page ...

An Income and Growth Plan Powered 3

by Dividends

Buy and hold... and collect and grow!

Under-the-Radar REITS

4

with Over-the-Top Returns

Up 15%+ for 2012, with potential for

additional growth, rising dividends.

Timely Tactic of the Month 4

How to benefit if the Dow Jones

industrial average stalls.

Kiplinger’s 25 for Income

5

Our 25 favorite outstanding

income investments.

Ask Jeff

6

Answers about electric utilities,

muni bonds, Pimco Income

Opportunity Fund, and more.

What’s New in Cash

7

Dividend-tax brawl ahead; Foreign

bonds at your fingertips; and

Bill Gross redeems himself.

Rates and Yields

7

Model Portfolio: Juiced-up Cash 8

How to protect your cash,

keep it liquid, and still earn 2%.

Inside This Issue...

All prices and related data as of April 23. FREE Special Report with your subscription:Safe Ways to Double or Triple Your Cash Yield!

Preferred Investor Invitation, You Save 61%!Keep Kiplinger’s Investing for Income coming every month at your low Preferred Investor rate.

Regular price: $199.00 + $5 first-class postage. Your Price: Just $79 for 12 issues of Kiplinger’s Investing for Income.

Mail To: Kiplinger’s Investing for Income, P.O. Box 62300, Tampa, FL 33662-2300. Or call 1- 866- 610- 1671.

Special Offer Code: KVTAZ29

Signature

Exp. Date

Card #: