Income-Generating Ideas for an Uncertain Market

I have not had a paycheck in two and a half years and am worth a lot more than I was when I was laid off.  Think about that.  No income for that time, but I have made a goodly sum of money and have not touched my principal.  It has only grown.  Granted, the stock market has smiled down on us.  That has been a huge help, but I have no confidence this will continue.   I cut corners on the little things in order to do the expensive things which, to me, make life worth living.  The following suggestions are good income-producers for any investor, but are primarily intended for those of us retired and living on a fixed-income.

Here are some ideas that have helped me.

ALPS Alerian MLP ETF – (AMLP) – Master Limited Partnerships own and operate pipelines to transport oil, natural gas and other commodities from one place to another.  The producer of the commodity pays the pipeline a fixed rate for access to the pipeline transport, and the fees do not fluctuate with the prices of the resource being moved.  MLP’s are set up to pay almost all their income to shareholders, much like a REIT, and as such, are subject to different taxation than ordinary investments.  If you own a single MLP, you must file a K-1 form rather than the usual 1099 income form.  AMLP seeks to get around this by creating a fund of MLPs, owning the top 10-20 MLP’s.  The yield is over 6%.

Utilities Select Sector SPDR (XLU) – This ETF gives you access to the top 30 or so Utilities in the country, companies like Con Edison. XLU is yielding 3.96% with an annual expense ratio of 0.20.  This is a fine investment for anyone long-term, but perfect for folks like us. All of the individual holdings are worth an investment on their own, and the yield may be higher, but you get them all here.  I own several of the holdings separately as well, including NuStar Energy (NS) yielding 6.30% , Xcel Energy (XEL) yielding 4.20% and Consolidated Edison (ED) yielding 4.80%.

Fidelity High Income Floating Rate Fund (FFRHX) –   A conservative play on bank loans with low costs and fine past performance.   Current yield is 3.45%.  When interest rates rise, bank loans get a boost.  This is a good play in the current environment.

Tobacco – Regardless of your personal feelings about tobacco, the industry continues to grow, particularly abroad.  Tobacco use among teenagers is increasing, as is the use of smokeless tobacco.  I own all four of the major tobacco companies and have for many years.  The tobacco lobby in Washington is among the strongest of any industry.  Altria (MO), the old Philip Morris, yields 5.90%.  Philip Morris International (PM) yields 3.90%.  Reynolds American (RAI) yields 5.90%.  Lorillard (LO) yields 5.50%.  Look at it this way; the customers are addicts, and they are not going away any more than crack addicts  abandon their dealers.  Tobacco use may make you a social pariah these days, and the product may kill you, but tobacco stocks can provide income to live.

Vanguard REIT Index (VGSIX) – You read every day about the horrendous state of the real estate industry.  Would it surprise you to know this fund is up 6.50% for 2011?  How about 24.20% for 2010 and 11.49 % for the last ten years?  Good property is always going to be a good investment, particularly Commercial real estate in big cities.  This fund yields 3.16% today with an expense ratio of 0.26%.  My favorite holding in the fund is Vornado Realty Trust (VNO) which I have owned since 1999.  In those eleven years, my return on Vornado is 127%.

GoldThere is no income here, but a great inflation hedge.  In times of uncertainty, with paper currencies losing credibility, people flock to hard assets.  I have only held gold for under two years, but have a 31% return.  I think if the market tanks, gold can reach $2000.00 an ounce.  I hold the SPDR Gold ETF (GLD), each share worth 1/10 of an ounce of gold.  The I Shares Gold Trust (IAU) gives you essentially the same thing, and the shares are much less expensive, probably worth about 1/100 of an ounce of gold.  Both hold strictly physical gold bullion.  I would only want 5% of my portfolio in gold and silver.  If you really think things are bleak, you could go to 10%.  I would not.  I like income.

Silver – Same deal as gold, but going up faster.  Silver, unlike gold, actually has industrial and commercial uses.  I have two silver holdings, both of which have been great performers. IShares Silver Trust (SLV) has returned 106% in around a year.  Silver Wheaton Corp. (SLW) has returned 163% in the same general time period.

Water I own two water utilities and have done well with both.  Middlesex Water (MSEX) is a water utility that has served PA, DE and NJ forever and yields 3.90%.  The need for water and thus water utilities is not going away anytime soon.  Connecticut Water Service (CTWS) has served that area since 1956 and yields 3.50%.

Money Market Funds – These instruments are yielding such a pittance that I only hold cash in them that I need to pay bills.  I keep the bulk of my cash in the Vanguard Short Term Investment Grade Corporate Bond Fund (VFSTX).  Should interest rates rise, you will feel some tremors here, but nothing like intermediate and long-term bonds.  VFSTX yields 1.78% with an expense ratio of 0.24%.  For people with $50,000.00 to invest, buy the Admiral Shares (VFSUX) yielding 1.89% with an expense ratio of 0.12%.  I’m willing to take on some risk in order to have my cash earn something.  VFSUX, for all practical purposes, is my money market fund.

T. Rowe Price Emerging Markets Bond Fund (PREMX) –   This fund yields 6.78% with an expense ratio of 0.97%.  I have owned this for almost ten years and have made 19%, between capital appreciation and reinvested dividends.  If emerging markets frighten you, don’t buy this one.

Mind you, all of these suggestions except FFRHX, PREMX, GLD, IAU and SLV are considered equities.  But they are very different from owning, for example, a large-cap growth fund.  Would you agree?

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2 Comments on “Income-Generating Ideas for an Uncertain Market”

  1. Robby Webb Says:

    Great blog Jud!

  2. Dave O'Neil Says:

    I just bought a smattering of these. Thanks for the tips, Jud.

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