Investing For Income

Posted: Updated:
Elaine Bedel established Bedel Financial in 1989 in Indianapolis. Elaine Bedel established Bedel Financial in 1989 in Indianapolis.

If you depend on your investment portfolio to generate income for living expenses, it has been a tough few years. Given today's low interest rates for bonds, many investors are looking for other options. But, this often requires taking on more investment risk.

Years of low interest rates for bonds, certificates of deposit, and Treasury bills have left investors starved for income. Although rates have crept up in the last couple of weeks, they are still near record low levels. As a result, investors are feeling pressure to look beyond these fixed income investments for more attractive yields.

This creates a conundrum. Safe bonds offer measly payouts, but higher yielding investments come with significantly greater risk and volatility. What are savers to do?

A possible solution is to take a more diversified approach to income investing by adding dividend paying stocks and real estate investment trust's (REITs) to your portfolio. Let's take a closer look at these income-producing investments and note what to pay attention to as you perform your due diligence.

Dividend Paying Stocks

With a stock, you own a piece of a business. Given possible share appreciation as well as cash dividends, the upside potential is greater than bonds. However, the value of the stock can decrease, making the downside greater, especially in the short term. Stocks that pay high dividends are generally considered more stable when compared to other stocks. These companies pay a portion of their profit to shareholders based on the number of shares an investor owns.

What to look for: Make sure the company is generating positive earnings with no losses for the past several years and that it has a proven track record of raising dividends. Look for a high yield, but not excessively high. A dividend yield of 4 percent to 6 percent is generally considered good in today’s low interest rate environment.

Look for companies that have safe dividend payout ratios, meaning they pay out no more than 50 percent of annual profit while reinvesting the rest back into the business for future growth. Paying out too much of the profits can hurt the firm’s competitive position.

Look for recession-resistant companies that have stable cash flows with little or no corporate debt and a high return on equity (ROE), at least 12 percent. If a firm has a high ROE with little or no debt, it typically has a better-than-average business model. This provides a bigger cushion in tough times which can help keep the dividend coming.

Real Estate Investment Trusts (REITs)

A REIT is essentially a mutual fund for real estate investments that can own everything from apartment buildings to offices, malls, warehouses, and hotels. It’s just like buying stock except you are buying into a company that owns or finances real estate. Note that when you buy a REIT, you own shares in companies. You don't personally own any of the properties.

REITs are required to pay out at least 90 percent of their taxable income to shareholders in the form of dividends, which makes them a strong income-generating investment. According to FTSE NAREIT (all REIT index), current average REIT dividend yield for all types of properties is 3.9 percent. Moreover, similar to stocks, REITs also provide the opportunity for capital appreciation.

What to look for:  Focus on growth in earnings which is typically tied to high occupancy rates, increasing rents, and lower costs. Look for REITs with properties in which rents are below current market levels. This will provide you with upside potential in stable markets and downside protection in times of slow economic growth.

Research the management team. Good management teams are essential. They should be able to upgrade their properties and enhance services when needed as well as effectively reinvest cash flow and develop strategies to create new business opportunities. They should also be able to consistently complete new projects on time and within budget.

Complements -- Not Substitutes!

It's important to understand that both dividend paying stocks and REITs should serve as complements to your bonds as part of a multi-asset income strategy and not as substitutes. After all, although safer bonds are currently low yielding, they provide valuable stability to your portfolio during periods of heightened volatility. How much to allocate to these income-generating options should be based on your overall investment goals and risk tolerance.

Summary

Many investors are craving for income, but are concerned about taking on additional risk. Carefully crafting a diversified income portfolio with bonds, dividend paying stocks, and REITs, may allow investors to earn more income in exchange for a manageable increase in risk.

Anthony Bykovsky, CFA, an Associate Portfolio Manager at Bedel Financial Consulting, contributed to this article.

Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money” segment. Elaine's book, "Advice You Never Asked For... But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at ebedel@bedelfinancial.com.

  • Perspectives

    • Overseas Outsourcing Can Create a World of Problems

      The internet broke down geographic barriers for businesses, making it possible to find lower-cost suppliers around the world. But if companies lack the knowledge and skills to manage those suppliers properly, they may end up spending far more than expected. We’ve worked with companies all over the globe to help our clients meet their advertising and marketing objectives while protecting their budgets. While most of those working relationships have been positive, we’ve had...
    More

Events



  • Most Popular Stories

    • Money magazine judges Fishers as 3rd best place to live in the U.S.

      Fishers Makes Top 10 List of 'Best Places to Live'

      Three communities in Indiana made the top 100 list of best places to live in the country, but only one made the top 10. Fishers was judged by Money magazine as the third best place to live in the United States, behind Clarksville, Tennessee and Round Rock, Texas.

    • 120WaterAudit Lands $7M in Funding

      Zionsville-based 120WaterAudit LLC has closed on a $7 million Series A round of funding. The company says it plans to use the funding to enhance its digital water cloud platform and expand sales and marketing efforts. The funding round was led by Indianapolis-based HG Ventures, with participation from Allos Ventures in Indy and California-based Greenhouse Capital Partners. 120WaterAudit's platform includes software and testing kits to help government agencies, public...

    • ‘Potential’ Fueling Downtown Makeover in Fort Wayne

      As Fort Wayne prepares to christen its latest big downtown project, Mayor Tom Henry says there are no signs of transformational development slowing down in the state’s second largest city. The Landing, a $34 million downtown redevelopment project, is expected to officially open soon, one of an estimated 14 projects that Henry says can help Fort Wayne become a destination city. Since the opening of Parkview Field more than a decade ago, Henry says momentum has...

    • Photo courtesy of Bristol Parks

      Startup Plans to Add 250 Jobs By 2021

      A metal forming startup is seeking to use a facility in Bristol that has been empty since 2017 for a major manufacturing operation. The Elkhart Truth reports Brinco will invest $52 million in the project and add 250 jobs.

    • New study reveals best place in Indiana for young families

      And the Best Place for Young Families Goes To...

      What do you look for in a community when deciding where to start a family and raise your children? There can be several factors to weigh in making a sound decision. Housing affordability. Unemployment rates. Quality of education. Mortage website Lendingtree.com has released the results of a study pointing to the best places for young families in Indiana.