• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

Are You Looking For Income In the Wrong Places?

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Interest rates have inched up but they are still ridiculously low.   As a result you might be one of many people desperately looking for income. That’s fine. But the problem is that many investors look for that income in the wrong places and take risks they may not be aware of. Let’s take a tour of the various investment income options that are very popular now and consider the ramifications of those alternatives a bit closer.

Bonds

Ever since 2008, investors have flocked to fixed income. The chart below tells the story. You can see that as bond prices have gone up more and more people have piled on. Does that ring any bells? Can you say B-U-B-B-L-E? Does this remind you of real estate or tech stocks? You remember what happened to those bubbles I’m sure. Don’t assume it won’t happen with bonds too. It will.

looking for income

That’s why bonds are not a good way to create income right now. In order to get a return north of 3% you have to tie your money up for a very long time and/or buy lower quality issues. That means risk my friend. As rates go up, the value of bonds decline. So fixed income investors could experience big disappointment if rates rise.

Even if you buy individual bonds and hold on to them until they mature it’s not attractive. If you go this route you’ll be locking into a low rate for a very long time. Let’s move on to a few other alternatives and see if they are more attractive.

If you want higher returns on your liquid money and CDs- consider Everbank. This is a wonderful online bank that consistently offers rates that among the top 5% of rates across the country – guaranteed*. They even pay interest on your checking account balances and they offer personal and business banking services. I love these guys.

MLPs

MLPs are master limited partnerships. When you invest in one of these you are buying stocks of companies that are involved with the energy delivery system. These companies don’t drill for that black gold….they just move it and store it for other companies through their pipes, trucks and storage facilities.

Master Limited Partnerships typically pay a very high dividend. And these investments might do really well over the near future if energy prices remain high. But just remember that if energy prices drop, the dividend these MLPs payout will likely decline. In turn, that might fuel a big drop in the share prices as well. I am not saying that MLPs are a bad investment. I’m just reminding you that there is still plenty of risk over the long-run with these stocks.

REITs

REITs (real estate investment trusts) are yet another angle investors looking for income have tried to play. Like MLPs, REITs must pay out 90% of their net taxable income to their shareholders. That’s why the yields are very high.

What these cupcakes do is buy up big pieces of real estate as the name indicates. The problem is that REIT’s have such large treasure chests of cash that they have to buy very large properties and there are very few investors or properties in that price range. They typically don’t get any big bargains. Since the supply of large properties is limited they often have to outbid other REITs to buy the assets. This means they often have to over-pay for their real estate.

They usually have no choice because they simply MUST put their money to work and buy big properties. As long as the tenants in those properties pay their rent (they don’t always) you’ll get your income alright. But when it comes time to sell the real estate, you may not do as well as you could. This is why I’m not a fan of REITs.
Don’t get me wrong. I love the idea of using real estate to create income. But I think you are far better off owning properties yourself or with partners than buying it through a REIT.

Stocks

There are a variety of ways to use stocks to create income and many of these are good ideas. One way is to buy preferred stock. These are more like bonds than stocks really. Preferred rarely rise in value but they do pay attractive rates. Most of the companies who issue preferred stock are financial firms so if you load up on these babies you won’t have much diversification. The other problem of course is the current low-rate environment. If rates go up dramatically it’s very possible that the value of preferred stock might decline substantially.

A better approach might be to consider dividend paying stocks and if you choose carefully, this could be a great decision. Theoretically, you could have an attractive cash payment plus the opportunity to grow your portfolio at the same time. Yureka!

But by far, my absolute favorite way to create income over the long run is to use equity growth. This approach simply asks you to invest in moderate risk growth funds and withdraw 4% of the value of the account each year. What surprises me is that this approach is often overlooked by investors. And that’s a shame because, given the alternatives, it seems to be the hands-down most attractive option.

Granted, when you rely on equity growth to create income your income fluctuates with the value of your portfolio. Also, using this method, you might find yourself taking withdrawals on your account during a declining market. This hurts because the combined one-two punch of a declining market coupled with account withdrawals can really put a dent in your account values.

The common theme here is that when you look for income investments, don’t ignore the value of your principal. Many of the fixed income alternatives that are most in vogue pose threats to that capital that most investors gloss over. Equity also exposes you to value fluctuations of course. But when you consider the long-term potential, it is a far better place to focus on.

What investments are you using to create income? Which investments are you passing over? Why?

Tweet
Pin1
Share1

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. Simon says

    July 16, 2013 at 10:35 AM

    Am in stocks and am quite intrigued by your idea of investing in moderate risk growth funds and withdrawing 4% of their value each year. Would you expound on it a bit more, like, why 4%? Any resources would be appreciated. Am staying clear of bonds and CD’s for now in my portfolio…holding some foreign currency too 🙂

    Reply
    • Neal Frankle says

      July 17, 2013 at 5:37 AM

      This might help

      Reply
      • Simon says

        July 17, 2013 at 5:59 AM

        Thanks Neal, really appreciated

        Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2022 All Rights Reserved