Income Stream
May 8, 2008 9:00 AM Subscribe
What is the best investment vehicle for "income stream", i.e. where can you put your money and get a return that you could live off of? Any recommendations?
I'm no investor, but rental properties seem to be an enduring favorite.
posted by box at 9:33 AM on May 8, 2008
posted by box at 9:33 AM on May 8, 2008
A mortgage pass-through security pays investors back each month. Also, look for dividend paying ETFs (often include the word "Achiever"). You would need to make arrangements for these types of instruments to pay dividends into a liquid money market account (or some other account) rather than have them reinvested. Also, annuities.
posted by mattbucher at 9:33 AM on May 8, 2008
posted by mattbucher at 9:33 AM on May 8, 2008
Seconding bonds.
Also, note that the best guaranteed yearly inflation-adjusted after-tax return you can get on an investment is usually less than 10%, so you need to invest at least 10 times your yearly expenses to be able to live off of the earnings indefinitely. Real estate investments seem like they take much less of an investment to get the same earnings, but you have to take into account any money that you borrow to invest (via a mortgage).
posted by burnmp3s at 10:15 AM on May 8, 2008
Also, note that the best guaranteed yearly inflation-adjusted after-tax return you can get on an investment is usually less than 10%, so you need to invest at least 10 times your yearly expenses to be able to live off of the earnings indefinitely. Real estate investments seem like they take much less of an investment to get the same earnings, but you have to take into account any money that you borrow to invest (via a mortgage).
posted by burnmp3s at 10:15 AM on May 8, 2008
depends on what you value: if you are retiring and need a base income that you will rely on never going away, then low risk bonds or even an Annuity might be best (Annuities are guaranteed to provide a set income for LIFE, no matter how long you live). But if you are younger and need an income stream that will keep up with inflation you need something more aggressive like large cap dividend producing stock, mutual fund, or just a balanced stock portfolio in general.
If you want a job, then get rental property, because that is what owning rental property is, a job as a rental property manager. Now you can hire a firm or something to "manage" your rental property, they will take 8-12% of your total revenue and deal with some or all of the day to day management (depending on the deal you strike), but if you are only going to own a few properties it will take some time or a prime piece of property before you have enough income stream to overcome the ~10% you are losing to your property manager. Not to mention that rental property falls into that more "aggressive" investment category and not so much "guaranteed" return, depending on your market. Vacancy, Evictions, Market Downturn, Repair and Replacement of appliances / sideing / yard work etc all are variables that eat into your income stream and cannot always be predicted.
If you do buy rental property ALWAYS factor in at least 10% of the total revenue (ie rents) from the property as going to a property manager, even if you are going to manage it yourself... because what happens if you want to move or its taking up too much time... when you do hire that property manager you don't want to be operating at a loss or on the knife's edge.
posted by DetonatedManiac at 10:26 AM on May 8, 2008
If you want a job, then get rental property, because that is what owning rental property is, a job as a rental property manager. Now you can hire a firm or something to "manage" your rental property, they will take 8-12% of your total revenue and deal with some or all of the day to day management (depending on the deal you strike), but if you are only going to own a few properties it will take some time or a prime piece of property before you have enough income stream to overcome the ~10% you are losing to your property manager. Not to mention that rental property falls into that more "aggressive" investment category and not so much "guaranteed" return, depending on your market. Vacancy, Evictions, Market Downturn, Repair and Replacement of appliances / sideing / yard work etc all are variables that eat into your income stream and cannot always be predicted.
If you do buy rental property ALWAYS factor in at least 10% of the total revenue (ie rents) from the property as going to a property manager, even if you are going to manage it yourself... because what happens if you want to move or its taking up too much time... when you do hire that property manager you don't want to be operating at a loss or on the knife's edge.
posted by DetonatedManiac at 10:26 AM on May 8, 2008
A mortgage pass-through security pays investors back each month.
Can retail investors even buy agency bonds? It's all OTC dealer stuff, IIRC. Anyway, the effect of prepayments and yield curve shifts on these pools make them wicked complicated. A retail investor can invest in that market is through stock in REITs that manage agency MBS portfolios (tickers: NLY, CMO, MFA, HTS, etc). There's also an ETF option, but I don't know much about it.
Anyway, if I were building an "income stream" portfolio, I'd probably break it up into two primary bucket: 1) dividend-yielding equities and 2) treasuries. In the first bucket I'd put a handful of index funds/ETFs from the following asset classes: a REIT fund (something like ICF), a Utilities fund (maybe something XLU), a high-dividend stock fund (something like DVY). You should do your research in order to minimize portfolio overlaps and try to work in international diversification. Try to minimize fees. Overall these type of assets are meant to provide a stream of dividends and provide some measure of inflation-protection. Risk of principal loss is always present.
The second bucket would consist of US Treasuries, probably through Treasury Direct. Perhaps a portion of which would be allocated to TIPS, which provide protection against inflation. I don't think corporate bonds (investment grade or high-yield) provide enough of a risk premium over risk-free treasuries to make up for the credit risk and inherit optionality that the issuer retains. At least not for passive retail investors.
I'm ignoring direct ownership in real assets like real estate or small businesses. Certainly that's an alternative route, but it's not my bailiwick.
posted by mullacc at 10:31 AM on May 8, 2008
Can retail investors even buy agency bonds? It's all OTC dealer stuff, IIRC. Anyway, the effect of prepayments and yield curve shifts on these pools make them wicked complicated. A retail investor can invest in that market is through stock in REITs that manage agency MBS portfolios (tickers: NLY, CMO, MFA, HTS, etc). There's also an ETF option, but I don't know much about it.
Anyway, if I were building an "income stream" portfolio, I'd probably break it up into two primary bucket: 1) dividend-yielding equities and 2) treasuries. In the first bucket I'd put a handful of index funds/ETFs from the following asset classes: a REIT fund (something like ICF), a Utilities fund (maybe something XLU), a high-dividend stock fund (something like DVY). You should do your research in order to minimize portfolio overlaps and try to work in international diversification. Try to minimize fees. Overall these type of assets are meant to provide a stream of dividends and provide some measure of inflation-protection. Risk of principal loss is always present.
The second bucket would consist of US Treasuries, probably through Treasury Direct. Perhaps a portion of which would be allocated to TIPS, which provide protection against inflation. I don't think corporate bonds (investment grade or high-yield) provide enough of a risk premium over risk-free treasuries to make up for the credit risk and inherit optionality that the issuer retains. At least not for passive retail investors.
I'm ignoring direct ownership in real assets like real estate or small businesses. Certainly that's an alternative route, but it's not my bailiwick.
posted by mullacc at 10:31 AM on May 8, 2008
Bonds are usually the core individual investments when people consider "income stream" as their main goal. Some annuities and life insurance policies effectively "guarantee" an income stream, too.
If someone about to retire is looking at total income replacement, a portfolio of "all bonds" is often not the best idea. While a large portion of the portfolio is probably going to be well-suited to bonds, someone retiring (or taking an early retirement) has some portion of the portfolio which is likely suited for being in a higher risk / higher return vehicle than a bond. The exact diversification mix among various asset types will change depending on age, expected spending habits, and risk tolerance.
There are mutual fund products that try to do this for you. So as you get closer to retirement (or past retirement) the asset allocation (usually between stocks and bonds) becomes more conservative.
posted by QuantumMeruit at 10:36 AM on May 8, 2008
If someone about to retire is looking at total income replacement, a portfolio of "all bonds" is often not the best idea. While a large portion of the portfolio is probably going to be well-suited to bonds, someone retiring (or taking an early retirement) has some portion of the portfolio which is likely suited for being in a higher risk / higher return vehicle than a bond. The exact diversification mix among various asset types will change depending on age, expected spending habits, and risk tolerance.
There are mutual fund products that try to do this for you. So as you get closer to retirement (or past retirement) the asset allocation (usually between stocks and bonds) becomes more conservative.
posted by QuantumMeruit at 10:36 AM on May 8, 2008
Can retail investors even buy agency bonds?
Even if they can't, I didn't see anything in the question saying the OP did/did not have a broker. I saw the question as what types of investments provide income.
posted by mattbucher at 10:49 AM on May 8, 2008
Even if they can't, I didn't see anything in the question saying the OP did/did not have a broker. I saw the question as what types of investments provide income.
posted by mattbucher at 10:49 AM on May 8, 2008
If you want to a very simple solution, Vanguard just set up some new funds that are designed for people who want an income stream that will last indefinately. They are called Managed Payout Funds. Vanguard has a good reputation for prudent managment and low costs. Unlike an annuity, you would still own any unspent funds.
posted by metahawk at 11:42 AM on May 8, 2008
posted by metahawk at 11:42 AM on May 8, 2008
This is a difficult question to answer without more details about your circumstances and needs. It is a common misconception that if you need income that you should only have interest paying bonds or dividend paying stocks. The problem with that approach is that inflation could eat you alive. The best portfolio to secure income is the one that gives you the best total return. Total return includes dividends and capital gains. Capital gains pay the rent just as well as dividends and are taxed at a lower rate. This means you should have a balanced portfolio of higher return stocks and lower risk bonds. The proportions of stocks to bonds depends on your willingness to take risk and your need to take risk. If you are younger and still working, a target retirement fund would be appropriate. If you are no longer working a the Vanguard Target Retirement Income fund might be better. Both of these have stocks -- the second just has a lower proportion. If you are in retirement with a fairly large portfolio, converting some of it to a single premium fixed annuity might be appropriate.
posted by JackFlash at 1:05 PM on May 8, 2008
posted by JackFlash at 1:05 PM on May 8, 2008
Seconding JackFlash: tax burdens and inflation are easy to forget but change the numbers substantially if omitted. Be sure to have the same basis for calculating your returns.
posted by Skorgu at 1:16 PM on May 8, 2008
posted by Skorgu at 1:16 PM on May 8, 2008
Response by poster: Thank you for your replies...
I have lost money playing the stock market and am trying to be more careful with my nest egg. I want to stay in retirement and minimize risk. Am aware that money market and CD rates (4.1% for a one-year CD at CountrywideBank.com today) are not as high as they used to be. And real estate (REIT's) may not have hit bottom yet. I suspect that people with a whole lot of money are taking it abroad and wonder if this is becoming a realistic option for those with less. I have heard of Brazilian bonds paying 20% and Czech CD's from www.rsal.cz at 7.25%. There seem to be so many hurdles and have heard about things being "too good to be true".
posted by kapec at 5:09 PM on May 8, 2008
I have lost money playing the stock market and am trying to be more careful with my nest egg. I want to stay in retirement and minimize risk. Am aware that money market and CD rates (4.1% for a one-year CD at CountrywideBank.com today) are not as high as they used to be. And real estate (REIT's) may not have hit bottom yet. I suspect that people with a whole lot of money are taking it abroad and wonder if this is becoming a realistic option for those with less. I have heard of Brazilian bonds paying 20% and Czech CD's from www.rsal.cz at 7.25%. There seem to be so many hurdles and have heard about things being "too good to be true".
posted by kapec at 5:09 PM on May 8, 2008
I have heard of Brazilian bonds paying 20% and Czech CD's from www.rsal.cz at 7.25%.
That way madness lies.
If you're worried about putting your principal at risk in US stocks and REITs, than you do not want to mess with foreign government bond. You'd be taking currency risk and default risk. See: 1997 Asian Financial Crisis, 1998 Russian Financial Crisis, 1998 Brazilian Financial Crisis, 1994 Tequila Crisis, 1999 Argentine Financial Crisis. And this is just within recent memory. I don't know how individual bond-holders made out in each of these cases, but obviously this is a treacherous path for the non-professional.
posted by mullacc at 9:25 PM on May 8, 2008
That way madness lies.
If you're worried about putting your principal at risk in US stocks and REITs, than you do not want to mess with foreign government bond. You'd be taking currency risk and default risk. See: 1997 Asian Financial Crisis, 1998 Russian Financial Crisis, 1998 Brazilian Financial Crisis, 1994 Tequila Crisis, 1999 Argentine Financial Crisis. And this is just within recent memory. I don't know how individual bond-holders made out in each of these cases, but obviously this is a treacherous path for the non-professional.
posted by mullacc at 9:25 PM on May 8, 2008
an annuity (by definition, but not as an investment strategy)
posted by doppleradar at 8:26 PM on May 9, 2008
posted by doppleradar at 8:26 PM on May 9, 2008
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posted by Pants! at 9:21 AM on May 8, 2008